We will discuss two new products the SEBI has finalized in its latest board meeting.

The News:

On 30th September, the SEBI approved the framework for two things related to mutual funds:

  1. New Investment Product/Asset Class
  2. Mutual Fund Lite

Let’s discuss each of them, and what they could mean for you.

1. New Investment Product/Asset Class

To build a context, currently, three types of SEBI-regulated investment vehicles operate in markets:

Mutual Fund:

  • Caters to retail investors mainly
  • The Minimum investment could be as low as ₹500

Portfolio Management Services (PMS):

  • Caters to High Net Worth Individuals (HNIs)
  • The minimum investment required is ₹50 lakhs

Alternative Investment Fund (AIF):

  • Caters to HNI & Ultra HNI
  • The minimum investment required is ₹1 crore

You see, there’s a vast gap between Mutual Funds and PMS.

Some investors may have a capital of a few lakhs and want more personalized & flexible services, but can not opt for PMS as it requires ₹50 lakhs minimum investment.

They have to settle with either mutual funds which might not be suitable for them or with some unregistered & unauthorized entities that might exploit them, leading to potential financial risks.

The solution?
A new product or asset class that aims to provide investors with an investible amount of ₹10 lakhs or more. A mutual fund but with greater flexibility and higher risk-taking capabilities.

It intends to add depth and variety to the country’s investment landscape through a new asset class.

While the new asset class would cater to the needs of people with a higher investible surplus, the second one is aimed at making passive investing more efficient and attracting more institutions to launch a passive-style fund. Here’s how.

2. Mutual fund lite

SEBI will introduce a simplified framework called “Mutual Funds Lite (MF Lite)” for passively managed mutual fund schemes, such as Exchange Traded Funds (ETFs) and index funds.

Current Framework:
SEBI’s existing rules were designed mainly for actively managed funds, which involve more risks and require complex decision-making by fund managers.

The new framework–MF Lite:
Passive funds, like ETFs and index funds, follow a fixed strategy with negligible intervention from fund managers.

To account for the simpler nature of passive funds, the SEBI is relaxing the rules for these schemes.

This lighter framework will:

  • Make it easier for new companies to enter the market by reducing the requirements for eligibility (like net worth and track record).
     
  • Encourage more competition, reduce compliance hurdles, and increase the spread of passive investments.

This new framework is meant to make it easier to launch and manage passive funds, encourage innovation, and increase investor participation in these types of schemes.

To conclude

The introduction of a New Asset Class bridges the gap between mutual funds and PMS, offering more tailored solutions for mid-tier investors. While MF Lite could enhance passive investing by making it more accessible.

For investors, this means greater choice, flexibility, and potentially lower risks.