What is Mutual Fund Lite? Everything you need to know about the new asset class that could become a reality on September 30

Capital markets regulator the Securities and Exchange Board of India (Sebi) is expected to pave the way for the launch of a mutual fund lite, which aims to bridge the gap between mutual funds (MFs) and asset management services (PMS).

The decision is likely to be taken during the next board meeting of Sebi on September 30, it said. Company standard, cite sources.

Under the proposed framework, investment funds that wish to manage exclusively passive arrangements will fall under the Mutual Fund Lite Regulations.

Existing mutual fund players are allowed to launch the new asset class. In fact, several players in the industry have already started to assemble a team and work on the strategies they plan to offer.

Sebi, in a consultation paper launched in July, had proposed a relaxed, light-touch regulatory framework as MF Lite Regulations for passive investment funds. The aim is to ease entry, encourage new players, reduce compliance requirements, increase penetration, facilitate diversification of investments, enhance market liquidity and encourage innovation.

In the document, the market regulator proposed a number of measures to curb speculative activities in the futures and options (F&O) segment.

Total cost ratio

The total expense ratio (TER) charged by passive schemes in the sector is generally around 20 basis points. Therefore, the TER charged on passive AUM of ₹10,000 crore would be approximately ₹20 crore. So if 50 percent of this is considered as the management fee, the turnover for an AMC will be ₹10 crores.

So in order to earn a turnover of ₹10 crore, an AMC will have to amass assets of at least 10 crore ₹10,000 crore, which it can acquire over a longer period.

Considering the above, a minimum net worth of ₹35 crore for AMCs could be appropriate under the main admission route as the entire amount of the AMC’s net worth has to be invested in liquid assets on a permanent basis, Sebi suggested in the document.

A lower minimum equity requirement is expected to provide the desired edge for a cost-effective and competitive passive MF industry.