To reduce the burden of compliance, SEBI will issue mutual fund-light regulations for passive funds

According to a senior official on Friday, the market regulator Sebi would release mutual fund lite rules for passive funds as part of measures to ease the burden of compliance, promote growth, and slash costs for investors.

A passive investment vehicle monitors an index of the market or a particular market sector. These funds include exchange traded funds (ETFs), passive index funds, and fund of funds that invest in ETFs.

The regulatory body wants to ease the compliance requirements for non-discretionary passive funds that are dependent on changes in the underlying index.

According to Sebi Whole Time Member Ananta Barua, the regulator is adopting mutual fund lite requirements to enable passive investments like index funds and ETFs.

“These laws will provide index funds and ETFs more freedom, allowing them to provide investors more transparency, diversity, and cheaper costs.

Speaking at the mutual fund conference hosted by industry group Assocham in the capital, Barua stated, “By reducing the compliance burden, Sebi hopes to foster the growth of passive investments in the Indian mutual fund industry.”

He claims that Sebi has changed the prerequisites for sponsoring a mutual fund, making it possible for organisations with strong financial standing, including private equity firms, to do so without having to demonstrate a history of profitable operations.

He noted that Sebi has implemented prudential requirements for open-ended mutual funds, particularly debt funds, to increase liquidity in the debt market and handle risks.

“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,” the man stated.

Barua underscored Sebi's commitment to advancing ethical business conduct in the mutual fund sector.

“Trustee oversight of Asset Management Companies (AMCs) has been tightened, and they now have new duties for monitoring fee and cost fairness, AMC performance, market abuse prevention, and conflict of interest avoidance.

He said that mutual funds are urged to perform their stewardship duty by actively taking part in voting and corporate governance affairs of the firms they participate in.

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