The Securities and Exchange Board of India has come up with a new framework to make life easier for passively managed mutual funds in India, and this is known as Mutual Fund Lite or MF Lite. It was launched on September 30, 2024. This move has reshaped the landscape of passive investment, and therefore, companies as well as investors will thrive together with it. The SEBI has streamlined rules for passively managed schemes to have the impact of letting more players in the mutual fund ecosystem and offering diversified, low-risk investment options to retail investors. It would increase market liquidity and attract participation from old as well as new Asset Management Companies (AMCs). MF Lite is going to democratize investment opportunities in the Indian financial market.
Passive funds are investment schemes tracking a definite market index, such as Sensex or Nifty 50. It works unlike actively managed funds which look to conquer markets. Usually, passive funds are designed to track the performance of a benchmark index they follow.
There are two broad categories of funds falling into this category: Index Funds and Exchange-Traded Funds. Index funds keep abreast with a specified market index, which may be the Nifty mid-cap index while the ETFs function similarly to other schemes. The only thing is that they are traded on the stock exchanges just like other individual stocks. Generally, passively managed mutual fund schemes are considered less risky than actively managed schemes. Because the constituents of the benchmark indices are openly known, it is easy to trace these schemes and thereby carry lower risks associated with them compared to the actively managed counterparts.
The SEBI observed that passively managed funds function on a strategy of replication of instruments that are subject to established guidelines. The AMCS of such funds will, therefore, have minimal discretion over the asset allocation and investment objectives.
This story is from the November 2024 edition of Indian Economy & Market.
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This story is from the November 2024 edition of Indian Economy & Market.
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