Mutual funds have stayed clear of MF Lite, a new light-touch regulation for passive funds, ironically at a time when ever more investors are flocking to such funds.
According to industry executives, the disinterest stems from several factors: new entrants are tied to passive funds; a high asset threshold restricts product flexibility by excluding niche indices; existing fund houses face complex operational and legal barriers to hiving off passive operations; and the low expense fees of passive funds dissuade small new entrants altogether.
The result: Ten months since the Securities and Exchange Board of India (Sebi) debuted MF Lite in December 2024 for both new and existing fund houses, no one has signed up. MF Lite allows new entrants to sign up solely to manage passive funds, and existing fund houses to spin off their passive operations to gain from easier norms and lower costs.
The new regime only allows schemes where the collective assets under management (AUM) of all passive funds tracking an index is above ₹5,000 crore. It, therefore, excludes niche categories such as factor-based and thematic indices, which typically have lower AUM.
Anil Ghelani, head of passive investments and products at DSP Mutual Fund said that MF Lite is a positive step towards a prudent regulatory environment which can benefit the passive ecosystem over time. However, currently, innovation will be limited under the MF Lite framework, he added.
“Fund houses will have to wait until an index gains significant AUM for them to launch a passive product based on it under this framework,” he added.
Meanwhile, the market for passive funds has boomed: Total assets under management (AUM) of passive funds increased from ₹1.56 trillion in fiscal year 2021 (FY21) to ₹2.12 trillion in FY25, according to the Association of Mutual Funds of India (AMFI). MF Lite aimed to promote ease of entry, encourage new players, reduce compliance requirements, increase penetration, facilitate investment diversification, increase market liquidity, and foster innovation, Mint reported earlier.
Queries emailed to a Sebi spokesperson remained unanswered.
Another reason is that most new players might not want to restrict themselves to passive products. “What if they plan to launch active funds in the future as well?” an executive at a fund house said on the condition of anonymity.
Moreover, many existing fund houses have little incentive to hive off their passive-funds business into a separate entity under MF Lite, especially if only part of their passive portfolio qualifies for it. A fund house, for example, may have 50 passive schemes but only 15 that track an index with a collective AUM of ₹5,000 crore.
Also, for existing AMCs, hiving off their passive-funds business into a separate entity is complex and resource-intensive, experts said. “The process involves significant operational and legal complexities related to restructuring—such as transaction documents, tax considerations, and corporate structuring,” said Rohit Jain, managing partner at Singhania & Co. He added that many established fund houses are content with the current setup, in which they can continue to expand their passive offerings without major restructuring.
Again, since passive funds typically have much lower expense ratios than active ones, it does not make much business sense for a new player to start out with passive funds. “It makes more sense for a mutual fund company with a high AUM to offer passive funds than for a new player to start with passive funds, as the smaller AUM and lower fees will hardly cover its costs,” said Jimmy Patel, managing director at Quantum Mutual Fund.
Most AMCs are, therefore, adopting a wait-and-watch approach, viewing MF Lite as the first phase of a gradual regulatory evolution—much like how India’s mutual fund rules developed over time, Ghelani said.
