SEBI’s Mutual Fund Lite Framework (2025) – IMPRI Impact And Policy Research Institute

Policy Update
Sudeepti Joshi

Background

A fund that tracks an index does not make the same investment decisions as a fund whose manager actively selects securities, yet both have historically faced the same regulatory requirements. The Securities and Exchange Board of India (SEBI) introduced the Mutual Fund Lite (MF Lite) framework to address this, creating a separate, lighter-touch regulatory route for passively managed schemes.

SEBI’s Board Memorandum on the proposal recorded that passive schemes, which it defined as index funds and exchange-traded funds (ETFs) taken together, had assets under management (AUM) of ₹10.95 lakh crore as of August 31, 2024. This was 16.4% of the mutual fund industry’s total AUM of ₹66.7 lakh crore (Securities and Exchange Board of India [SEBI], 2024a). This growth was the stated reason to reconsider whether the existing regulatory framework, designed primarily around actively managed schemes, still fit a passive segment of this size.

SEBI’s Board approved the proposal, and the SEBI (Mutual Funds) Regulations, 1996 were amended on December 16, 2024. The operating rules followed in a circular dated December 31, 2024, which came into effect on March 16, 2025 (SEBI, 2024b). The year in the title refers to this effective date.

The framework has since been written into the main rulebook. The SEBI (Mutual Funds) Regulations, 2026, which replaced the 1996 Regulations, came into force on April 1, 2026 and give MF Lite its own chapter (SEBI, 2026).

Functioning

MF Lite creates a separate regulatory route for eligible passive mutual fund schemes. It relaxes sponsor eligibility requirements and simplifies compliance, disclosure and operational requirements, and it is not limited to new fund houses. The circular has three parts: provisions for fund houses registered under MF Lite, relaxations that apply to every eligible passive scheme whether or not its fund house is registered under MF Lite, and new products open to all fund houses (SEBI, 2024b). Existing asset management companies (AMCs) can therefore use the relaxed disclosure and compliance rules for the eligible passive schemes they already run, or hive these schemes off into a separate MF Lite entity under the same sponsor (SEBI, 2024b).

The Board Memorandum was a proposal, and the circular is the final rule. The circular fixes the threshold for domestic debt funds at ₹5,000 crore and brings gold and silver ETFs into the first phase, although the memorandum’s list of eligible categories does not mention them (SEBI, 2024a, 2024b).

The framework does not cover every passive product. In its first phase, the circular covers five groups of schemes (SEBI, 2024b).

Table 1: Passive schemes covered in phase 1 of MF Lite

Source: SEBI (2024b).

The circular does not spell out how collective AUM is calculated. The memorandum describes the test as a threshold on the AUM following an index (SEBI, 2024a), so the natural reading is the combined AUM of all passive funds that track the index, tested every 31 December. AMFI, in consultation with SEBI, publishes the lists of qualifying domestic equity, domestic debt and overseas indices (SEBI, 2024b). A scheme therefore qualifies only if its benchmark is on the current list, and because the test is repeated each year, the list can change from year to year.

Section 3 of the circular opens two new products to every fund house, registered under MF Lite or not: hybrid index funds and ETFs that track a composite of equity and debt indices in three categories (balanced, equity oriented and debt oriented), and close-ended debt passive schemes based on target maturity indices. Debt-oriented passive schemes must also disclose a Debt Index Replication Factor, which shows how closely the portfolio copies its index (SEBI, 2024b).

An active fund manager makes decisions based on research and expectations about individual securities. A passive fund generally follows a benchmark index, so its strategy is more rule-based, though it still carries market risk, tracking error, and operational risk. MF Lite is built on this distinction: it reduces requirements judged unnecessary for passive schemes while keeping core investor protections in place.

Performance

Passive AUM has grown since the Board Memorandum. Monthly notes from the Association of Mutual Funds in India (AMFI) put passive funds, which include index funds and ETFs, at ₹14.70 lakh crore in September 2026, against total industry AUM of ₹82.64 lakh crore (Association of Mutual Funds in India [AMFI], 2026b). That is about 17.8% of industry assets, calculated from the same note, compared with 16.4% in August 2024. AMFI’s February 2026 note records an all-time high of ₹15.41 lakh crore for passive AUM (AMFI, 2026a), so September’s figure sits below the peak after a 4.6% fall during the month (AMFI, 2026b).

Table 2: Passive AUM at the time of the proposal and in September 2026

Source: SEBI (2024a); AMFI (2026b). Figures are not adjusted for market movements.

This growth cannot be credited to MF Lite so far. The framework took effect in March 2025, and the first reported approval under it was an in-principle approval for 1 Finance, announced on October 19, 2026. The firm expects to launch in the fourth quarter of FY 2026-27 and cannot launch schemes until SEBI grants final registration (Kumar, 2026). No fund house had been reported as finally registered under the framework, or as having launched a scheme under it, at the time of writing.

New passive launches continue elsewhere in the market. AMFI counts eight in September 2026, raising ₹685 crore, but the data does not show how many of them used the MF Lite provisions (AMFI, 2026b). Because the relaxations in Section 2 of the circular apply to the eligible passive schemes of existing AMCs, part of the framework’s effect may already be reaching the market through them.

The cost relief works through three channels, all set out in the circular (SEBI, 2024b). On staffing, an MF Lite AMC need not appoint a separate Chief Risk Officer, as the Chief Compliance Officer can take the role. On governance, trustees need not have a risk management committee or an audit committee, the AMC’s risk committee is optional, and the AMC’s audit committee can take over its work. On reporting, the half-yearly trustee report to SEBI is replaced by a yearly AMC report, a separate Key Information Memorandum is no longer needed, scheme information documents are updated once a year, equity portfolios are disclosed quarterly, and half-yearly unaudited financials are no longer published.

A lighter compliance structure may help new fund houses enter the market and let existing AMCs run eligible passive schemes more efficiently, but whether that lowers costs for investors depends on competition, scale, and how much of the saving gets passed on rather than retained by fund houses. SEBI’s own analysis shows that the maximum permissible total expense ratio (TER) for passive funds is 100 basis points, while the average actually charged is about 20 basis points (SEBI, 2024a). With costs already this low, compliance savings leave limited room for a visible fall in the TER. The more likely first effect is on entry. A new MF Lite fund house carries lower fixed costs and does not have to meet the full net worth requirement until its AUM crosses ₹1 lakh crore (SEBI, 2024b). Investors benefit only if competition among fund houses pushes those savings into lower fees.

Impact

A reduction in compliance costs does not automatically produce lower expense ratios or wider investor participation. Those outcomes have to be measured after implementation, not assumed from the policy’s stated objectives.

Given the framework’s recency, there is still no post-implementation data to show whether MF Lite has actually changed expense ratios, scheme launches, or market entry by new players. Nineteen months after the circular took effect, no fund house had been reported as finally registered under it, and the first in-principle approval came only in October 2026 (Kumar, 2026). This is a genuine limitation for assessing the policy at this stage. The case for MF Lite rests on its design logic (lower risk in passive schemes justifying lower compliance burden), not yet on observed results.

What can be assessed is the wider passive market, which grew from ₹10.95 lakh crore to ₹14.70 lakh crore between August 2024 and September 2026 (SEBI, 2024a; AMFI, 2026b). That growth came from investors and fund houses already in the market, and it should not be read as an effect of MF Lite.

Emerging Issues

Whether simplified requirements can maintain adequate supervision is an open question. Passive funds involve less discretion in security selection, but they still need reliable disclosures, effective governance, and safeguards against operational failures or market abuse. The circular does keep some safeguards in place. Trustees still receive reports on tracking error, tracking difference, voting and changes in the TER, and must tell SEBI of adverse observations. Fast-track approval of scheme documents is mandatory, and equity passive schemes must target a tracking difference of 50 basis points over the TER (SEBI, 2024b).

The framework’s reach is also limited by design. Only specified categories of schemes qualify in its first phase, so some passive products remain outside MF Lite for now, including funds of funds that invest in more than one index. Because the AUM tests are repeated each 31 December, the list of qualifying indices can also shift between years. SEBI will need to assess whether the eligibility criteria still make sense as the passive market grows.

There is a real competition question underneath both of these. A smaller compliance burden could make it easier for new players to enter, giving investors more choice. But compliance is only one barrier. With the average TER at about 20 basis points (SEBI, 2024a), a passive fund house earns little on each rupee it manages and needs scale to cover its fixed costs. The memorandum records industry concerns that brokers, whose earnings depend on volume, have little reason to serve low-fee passive funds, and SEBI proposed higher broker limits in response (SEBI, 2024a).

Distribution reach, brand recognition and the ability to raise enough AUM early also decide whether a new fund house survives, and a lighter compliance regime does not address any of them. Respondents to SEBI’s consultation also argued that a passive-only AMC would not compete on equal terms with an existing AMC that keeps its passive schemes, because the MF Lite AMC would be limited to broad-based index funds (SEBI, 2024a).

If cost savings stay with fund houses rather than reaching investors, the practical effect could be limited. The framework’s success should be judged by measurable change in expenses, participation and market concentration, not by how many requirements were simplified.

Way Forward

Measure outcomes directly

– Compare scheme expense ratios and operating costs before and after implementation, rather than assuming compliance savings translate automatically into investor benefit.

– Evaluate competition, market entry by new players, and investor participation as separate, measurable outcomes, not inferred from a shorter compliance checklist.

– Publish the implementation record regularly: the number of fund houses finally registered under MF Lite, the schemes they launch, and the share of passive AUM they manage.

– Treat a reduced regulatory burden as the mechanism being tested, not as evidence of success in itself.

Retain essential safeguards

– Continue effective oversight of disclosures, governance, valuation, and conflicts of interest even as other compliance requirements are simplified.

– Monitor whether reduced discretion in passive fund management is matched by correspondingly adequate supervision of operational and market-abuse risk, the open question raised directly in Emerging Issues.

Review eligibility periodically

– Reassess whether the current first-phase thresholds still reflect the structure of the passive fund market as it grows: ₹5,000 crore of collective AUM for domestic equity and domestic debt index funds, and $20 billion of underlying-index AUM for overseas funds.

– Set out the criteria for each review in advance. SEBI’s concern, recorded in the memorandum, was that illiquid or bespoke indices could turn a passive fund into an active one in disguise and create liquidity risk under stress (SEBI, 2024a). Each candidate category could therefore be tested against five questions: how large its AUM is, how liquid the underlying index is, how concentrated it is, how many investors already use it, and how complex it is to run.

– Revisit whether additional passive product categories, such as funds of funds investing in more than one index, should be brought under MF Lite, and on what basis, rather than treating the first-phase scope as fixed.

References

1. Association of Mutual Funds in India. (2026a). AMFI monthly note: February 2026. https://www.amfiindia.com/uploads/AMFI_Monthly_Note_Feb2026_07ce65814b.pdf

2. Association of Mutual Funds in India. (2026b). AMFI monthly note: September 2026. https://www.amfiindia.com/uploads/AMFI_Monthly_Note_September2026_554f6604b6.pdf

3. Kumar, A. (2026, October 19). 1 Finance gets Sebi in-principle nod to launch passive-only MF business. Business Standard. https://www.business-standard.com/companies/news/1-finance-gets-sebi-in-principle-nod-to-launch-passive-only-mf-business-126101901115_1.html

4. Securities and Exchange Board of India. (2024a). Amendments to the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 for introduction of a Mutual Funds Lite (MF Lite) framework for passively managed schemes of mutual funds [Board memorandum]. https://www.sebi.gov.in/sebi_data/meetingfiles/oct-2024/1728636739170_1.pdf

5. Securities and Exchange Board of India. (2024b, December 31). Introduction of a Mutual Funds Lite (MF Lite) framework for passively managed schemes of mutual funds (Circular No. SEBI/HO/IMD/PoD2/P/CIR/2024/183). https://www.sebi.gov.in/legal/circulars/dec-2024/introduction-of-a-mutual-funds-lite-mf-lite-framework-for-passively-managed-schemes-of-mutual-funds_90393.html

6. Securities and Exchange Board of India. (2026). Securities and Exchange Board of India (Mutual Funds) Regulations, 2026 (SEBI/LAD-NRO/GN/2026/296; amended up to July 7, 2026). https://www.sebi.gov.in/sebi_data/attachdocs/jul-2026/1783933012694.pdf

About the Contributor

Sudeepti Joshi is a second-year B.A. (Hons.) Economics student at Dayal Singh College, University of Delhi. Her academic and research interests include economics, public policy, development and institutional finance.

Reviewers

Khushi and Anamika P K

Acknowledgements

The author extends sincere gratitude to the IMPRI team for their valuable guidance and support.

Disclaimer

All views expressed in the article belong solely to the author and not necessarily to the organization.

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