It’s been 10 months since markets regulator Sebi introduced MF Lite, a light-touch regulatory framework for mutual fund companies looking to offer only passive funds.
The market for passive funds in India is booming. Total assets under management (AUM) of passive funds increased from ₹1.56 trillion in FY21 to ₹2.12 trillion in FY25, according to the Association of Mutual Funds of India (AMFI).
Yet, since its launch in December 2024, there have been no takers for MF Lite, which is open to both new and existing fund houses. New entrants can register exclusively for passive fund management, while existing AMCs can spin off their passive operations into a separate entity to benefit from the relaxed norms and lower costs.
However, no new company has registered for MF Lite thus far and no existing asset management company (AMC) has separated its passive-funds business to run it under this framework.
So why is MF Lite yet to take off? Industry executives said one reason is that most new players don’t want to restrict themselves to passive products. “What if they plan to launch active funds in the future as well?” said an executive at an AMC, who did not wish to be named.
Another deterrent is less product flexibility under MF Lite. It 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.
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.
Where’s the incentive?
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.
Another issue is that since passive funds typically have much lower expense ratios than active ones, a new player starting out with passive funds makes little business sense, experts said. “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.
Queries emailed to Sebi remained unanswered.
