Why in news? SEBI will soon introduce a new light-touch regulatory framework–‘Mutual Fund Lite’  for passively managed mutual funds like exchange traded funds (ETFs) and index funds, which have seen a sharp uptick in assets under management (AUM) in recent years.

Mutual Fund Lite

• These regulations will provide greater flexibility for index funds and ETFs, enabling them to offer transparency, diversification, and lower costs to investors.
• These regulations include requirements for minimum liquidity buffers, restrictions on investments in a single company or sector, and self-testing to assess the impact of market movements on the Net Asset Value (NAV) of the fund
• Trustee supervision of Asset Management Companies (AMCs) has been strengthened, and they now have additional responsibilities for overseeing fairness of fees and expenses, AMC performance, prevention of market abuse, and avoidance of conflicts of interest.
• Mutual funds are encouraged to exercise their stewardship role by actively participating in voting and corporate governance matters of the companies they invest in.
• Establishment of an exhibition only platform for direct plans, allowing fintech companies to offer access to a larger pool of investors. This move promotes competition and encourages the establishment of more mutual funds

Aim:

• By easing the compliance burden, SEBI aims to foster the growth of passive investments in the Indian mutual fund industry

Advantages of the new rules:

• The new regulations will undoubtedly benefit both the industry and investors.
• With streamlined compliance procedures, asset management companies can focus more on managing portfolios and delivering optimal returns to investors.
• The simplified regulations will encourage the growth of passive funds, which offer cost-effective and diversified investment options to retail and institutional investors alike.
• Increase the market competition amongst Mutual Fund players which will benefit investors by driving down fees and improving performance.

What are Passive Funds?

• Passive funds are a type of mutual fund that tracks a particular market index, such as the Nifty 50 or the Sensex. They are designed to provide investors with a low-cost way to track the performance of the market.
• Unlike with an active fund, the fund manager does not decide what securities the fund takes on.
• This normally makes passive funds cheaper to invest in than active funds, which require the fund manager to spend time researching and analysing opportunities to invest in.
• Tracker funds, such as ETFs (exchange traded funds) and index funds fall under the banner of passive funds.