What is Mutual Fund Lite? All you need to know about the new asset class that may become a reality on Sept 30

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

The decision is likely to be taken at the Sebi’s forthcoming board meeting on September 30, reported Business Standard, quoting sources.

Under the proposed framework, mutual funds that want to manage only passive schemes will be covered under the Mutual Fund Lite Regulations.

Existing mutual fund players will be permitted to launch the new asset class. In fact, several industry players have already started putting in place a team and started working on the strategies they plan to offer.

Sebi, in a consultation paper floated in July, had proposed a relaxed framework with light-touch regulations as MF Lite Regulations for passive mutual fund schemes. The intent is to promote ease of entry, encourage new players, reduce compliance requirements, increase penetration, facilitate investment diversification, increase market liquidity and foster innovation.

In the paper, markets regulator had proposed a number of measures to curb speculative activity in the futures and options (F&O) segment.

Total expense ratio

The total expense ratio (TER) charged by passive schemes across the industry is generally around 20 basis points. Hence, the TER charged on passive AUM of ₹10,000 crore would be approximately ₹20 crore. So, if 50 per cent of this is believed to be the management fee, the revenue for an AMC will be ₹10 crore.

So, in order to earn a revenue of ₹10 crore, an AMC will have to garner assets of at least ₹10,000 crore, which it may procure over a long period of time.

In view of the above, a minimum net worth of ₹35 crore for AMCs may be appropriate under the main eligibility route as the entire amount of this net worth of the AMC shall have to be deployed in liquid assets on a perpetual basis, Sebi had proposed in the paper.

A lower minimum net worth is expected to provide a desired head start for a cost-effective and competitive passive MF industry.