Note4Students
From UPSC perspective, the following things are important :
Prelims level: Passive mutual fund;
Mains level: Liberalisation of mutual funds;
Why in the News?
On September 30, the Securities and Exchange Board of India (SEBI) launched the liberalized Mutual Funds Lite (MF Lite) framework specifically for passively managed schemes.
What is a Passive Mutual Fund?
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Key highlights of the liberalized Mutual Funds Lite (MF Lite) framework:
- Separate Framework for Passive Funds: It is tailored for passively managed schemes, which are less risky and require minimal active management.
- Relaxed Entry Requirements: Lowered net worth requirement (₹35 crore), simplified criteria for sponsor eligibility (profitability, track record).
- Encouraging New Players: It provides easier entry for new AMCs (Asset management companies) and market players in the passive fund segment.
- Governance Flexibility: It has reduced oversight for trustees; operational responsibilities shifted to AMC boards, focusing on fees, expenses, and tracking error.
- Cost Efficiency Focus: It emphasizes on lowering Total Expense Ratio (TER) and minimizing tracking error for better returns.
- Simplified Disclosures: The Scheme Information Documents (SID) are simplified to focus on key metrics like benchmark index, TER, and tracking error.
- Risk Management: Audit committees of AMCs can handle risk management duties due to the lower risk profile of passive funds.
Why a Separate Framework for MF Lite is Needed?
- Lower Risk Profile: Passively managed funds are generally less risky because they track established benchmarks like BSE Sensex or Nifty50, reducing the need for active decision-making.
- Minimal Asset Manager Discretion: Unlike actively managed funds, asset managers of passive funds have limited discretion in asset allocation and investment objectives. They simply mirror the performance of the benchmark index.
- Inapplicability of Existing Regulations: The current framework is designed primarily for actively managed funds, which involve more risks and require more oversight. It is less suitable for passive funds, which operate with predefined, transparent rules.
- Cost-Effective Market Entry: To encourage new players and make the passive fund industry more competitive, SEBI introduced relaxed regulations regarding eligibility, net worth, and profitability.
What about risks and disclosures?
- Success depends on Total Expense Ratio (TER) and tracking error. Lower costs and minimal deviation from the benchmark are crucial for performance.
- Scheme Information Documents (SID) focus on key metrics like the benchmark name, TER, and tracking error, leaving out complex strategies.
- Risk management responsibilities are streamlined, allowing the audit committee of the AMC to handle oversight, reflecting the lower risks of passive funds.
Way forward:
- Enhance Investor Education: Develop targeted educational initiatives to inform retail investors about the benefits, risks, and operational aspects of passive mutual funds, fostering informed investment decisions.
- Ongoing Regulatory Evaluation: Establish a framework for periodic assessment and adaptation of the MF Lite regulations to ensure they remain effective and relevant, promoting competition while safeguarding investor interests.
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