Policies · BFSI
SEBI's Mutual Fund Lite framework creates a separate, lighter regulatory route for passive mutual fund schemes, reducing compliance and governance requirements while retaining core investor protections.
✦ AI SUMMARY 30-second read
- The circular, which took effect on March 16, 2025, relaxes sponsor eligibility, staffing, governance and reporting requirements for eligible passive schemes and MF Lite-registered fund houses.
- Passive funds stood at ₹14.70 lakh crore, or about 17.8 per cent of total industry AUM of ₹82.64 lakh crore, in September 2026, up from ₹10.95 lakh crore and 16.4 per cent in August 2024.
- As of October 2026, no fund house had been finally registered under the framework; the first in-principle approval was granted to 1 Finance on October 19, 2026.
Why it matters: The framework is designed to lower entry barriers and running costs for passive fund houses, with investor benefit depending on how much any savings flow through to lower expense ratios.
This summary was generated by AI. Editors may review and update it.
Document details
| Document type | Framework |
|---|---|
| Issued by | SEBI |
| Region | India |
| Published | 3 November 2026 |
SEBI amended the SEBI (Mutual Funds) Regulations, 1996 on December 16, 2024 to create the Mutual Fund Lite framework for passively managed schemes. An implementing circular dated December 31, 2024 came into effect on March 16, 2025. The framework has since been carried into the SEBI (Mutual Funds) Regulations, 2026, which replaced the 1996 Regulations on April 1, 2026 and give MF Lite its own chapter.
The stated rationale was that passive schemes, which include index funds and exchange-traded funds, had reached ₹10.95 lakh crore in assets under management as of August 31, 2024, representing 16.4 per cent of total mutual fund industry AUM of ₹66.7 lakh crore. SEBI judged that a regulatory framework built primarily around actively managed schemes no longer suited a passive segment of this size.
The framework is not limited to new fund houses. Existing asset management companies can apply the relaxed rules to eligible passive schemes they already operate, or separate those schemes into a distinct MF Lite entity under the same sponsor.
What the circular says
The December 31, 2024 circular has three parts. The first sets out provisions that apply specifically to fund houses registered under MF Lite. The second lists relaxations available to every eligible passive scheme, regardless of whether its fund house is registered under MF Lite. The third opens two new products to all fund houses: hybrid index funds and ETFs tracking a composite of equity and debt indices in three categories, and close-ended debt passive schemes based on target maturity indices.
On staffing, an MF Lite AMC need not appoint a separate Chief Risk Officer; the Chief Compliance Officer can take on that role. On governance, trustees are not required to maintain a risk management committee or an audit committee, the AMC's risk committee is optional, and the AMC's audit committee can absorb its functions. On reporting, the half-yearly trustee report to SEBI is replaced by a yearly AMC report, scheme information documents are updated once a year, equity portfolios are disclosed quarterly, a separate Key Information Memorandum is no longer required, and half-yearly unaudited financials are no longer published.
A new Debt Index Replication Factor must be disclosed by debt-oriented passive schemes to show how closely the portfolio tracks its index. The circular fixes the threshold for domestic debt funds at ₹5,000 crore and includes gold and silver ETFs in the first phase. Eligibility is reassessed each December 31, so the list of qualifying indices can shift between years. AMFI, in consultation with SEBI, publishes the lists of qualifying domestic equity, domestic debt and overseas indices.
The maximum permissible total expense ratio for passive funds is 100 basis points, while the average actually charged is about 20 basis points. A new MF Lite fund house does not have to meet the full net worth requirement until its AUM crosses ₹1 lakh crore.
Who is affected
Any fund house seeking to run only eligible passive schemes can apply for registration under MF Lite and benefit from lower fixed costs and relaxed governance requirements. Existing AMCs can apply the circular's Section 2 relaxations to qualifying passive schemes they already manage, without setting up a separate entity.
Investors in eligible passive schemes stand to benefit if lower compliance costs translate into reduced expense ratios, though SEBI's own analysis notes that the average TER is already about 20 basis points, leaving limited room for a visible further reduction. The circular retains safeguards: trustees still receive reports on tracking error, tracking difference, voting and TER changes, must notify SEBI of adverse observations, and equity passive schemes must target a tracking difference of 50 basis points over the TER.
Implementation so far
No fund house had been finally registered under MF Lite at the time of writing, nineteen months after the circular took effect. The first in-principle approval under the framework was granted to 1 Finance on October 19, 2026; the firm expects to launch in the fourth quarter of FY 2026-27 but cannot launch schemes until SEBI grants final registration.
Passive AUM reached an all-time high of ₹15.41 lakh crore in February 2026 before falling to ₹14.70 lakh crore in September 2026, a decline of 4.6 per cent during the month. Eight new passive schemes were launched in September 2026, raising ₹685 crore, though the data does not indicate how many used MF Lite provisions. Because the Section 2 relaxations apply to existing AMCs' eligible passive schemes, part of the framework's effect may already be reaching the market through those AMCs.
What happens next
The absence of post-implementation data means the framework's effect on expense ratios, scheme launches and market entry cannot yet be measured. SEBI will need to compare costs and participation before and after implementation, and to publish the number of fund houses finally registered, the schemes they launch and the share of passive AUM they manage.
Structural barriers beyond compliance remain. With average TERs at about 20 basis points, a passive fund house needs significant scale to cover fixed costs. Distribution reach, brand recognition and early AUM growth are not addressed by a lighter compliance regime. SEBI's Board Memorandum also noted industry concerns that brokers, whose earnings depend on volume, have limited incentive to distribute low-fee passive funds, and SEBI proposed higher broker limits in response.
SEBI will also need to review whether the eligibility criteria remain appropriate as the passive market grows, and monitor whether reduced governance requirements are matched by adequate supervision of operational risk and market conduct.
