SEBI Unveils 2 Key Reforms: New Investment Product & MF Lite to Boost Markets

 

SEBI introduces new investment product and mutual fund lite framework . In a bid to enhance the Indian investment landscape, the Securities and Exchange Board of India (SEBI) has introduced key reforms in the mutual fund space. These changes are aimed at bridging existing gaps between mutual funds and portfolio management services, offering more flexible and regulated products for investors, and creating a simplified framework for passively managed schemes. The introduction of a new investment product under the mutual fund framework and the liberalization of a “Mutual Funds Lite” (MF Lite) framework for passive schemes are expected to diversify and deepen India’s financial markets.

1. Introduction of a New Investment Product/Asset Class:

SEBI has approved amendments to its Mutual Funds Regulations (1996) to introduce a new investment product that offers more flexibility in portfolio construction. This product aims to address the gap between traditional mutual funds and portfolio management services (PMS). Its primary objective is to provide a professionally managed, well-regulated investment product that allows higher risk-taking capacity while safeguarding investors against unauthorized and unregistered schemes promising unrealistic returns.

The new investment product will be designed with several safeguards:

• No Leverage: This means the product cannot use borrowed money to amplify returns, minimizing the risk for investors.
• Limited Exposure to Unlisted or Unrated Instruments: The product cannot invest in unlisted or unrated securities beyond what is already permitted for mutual funds.
• Derivative Exposure: Exposure to derivatives will be capped at 25% of Assets Under Management (AUM) and will only be used for purposes other than hedging and rebalancing.

This product will offer greater flexibility, especially for larger investors, as the minimum investment size is set at INR 10 lakh per investor across all strategies within an Asset Management Company (AMC). The term “Investment Strategies” will be used for offerings under this new product to distinguish them from traditional mutual fund schemes.

2. Introduction of Liberalized Mutual Funds Lite (MF Lite) Framework:

SEBI is also bringing a liberalized regulatory framework for passively managed mutual fund schemes like Exchange Traded Funds (ETFs) and index funds. Passive funds follow a rule-based investment strategy, meaning the asset allocation and investment objectives are predefined, and there is very little discretion for the AMC in managing them. These funds, therefore, carry fewer complexities and risks compared to actively managed schemes.

Recognizing these differences, SEBI has approved a “MF Lite” framework, which introduces “light-touch” regulations for passive mutual fund schemes. This framework will include relaxed requirements for:

• Eligibility Criteria for Sponsors: The net worth, track record, and profitability criteria will be relaxed for sponsors looking to launch passive schemes.
• Responsibilities of Trustees and Approval Process: Trustees will have reduced responsibilities in passive schemes, and the approval and disclosure process will be simplified.

This MF Lite framework is aimed at encouraging new entrants, promoting ease of entry into the passive mutual fund market, reducing compliance requirements, and fostering market liquidity. By simplifying the regulatory environment, SEBI hopes to enhance market penetration and facilitate the launch of innovative financial products.

For existing AMCs managing both active and passive funds, the new framework offers flexibility. They can:

• Separate Passive and Active Schemes: AMCs may choose to manage passive schemes through a separate group entity, maintaining active and passive schemes under different AMCs.
• Continue Managing Both Schemes Together: Alternatively, AMCs can continue managing both types of schemes under the existing framework, while still benefiting from the lighter regulatory requirements applicable to passive schemes.

Conclusion:

SEBI’s introduction of a new investment product and the MF Lite framework represents a major evolution in India’s mutual fund market. These changes offer investors more flexibility and choice, while also protecting them with proper risk mitigation. By liberalizing the framework for passive funds, SEBI aims to encourage more players to enter the market and provide a diverse range of investment options, promoting financial inclusion and innovation in the Indian financial ecosystem. These reforms will likely strengthen the mutual fund market, bringing greater dynamism and broader access to professional investment strategies.