SEBI plans to ease mutual fund regulations for passive funds

In an effort to promote passive investing, capital market regulator SEBI plans to ease regulations for index funds and exchange-traded funds.

To facilitate passive investments such as index funds and ETFs, the regulator will introduce new standards that will reduce compliance requirements for passive funds, said Ananta Barua, permanent member of SEBI. These funds are linked to changes in the underlying index and operate on the basis of pre-determined rules, without making discretionary decisions.

The regulations will provide greater flexibility to index funds and ETFs, enabling them to provide transparency, diversification and lower costs to investors, he said at the 15th Mutual Fund Summit organized by the Joint Chamber of Commerce and Industry on Friday. He added that SEBI aims to promote the growth of passive investments in the Indian mutual fund industry by reducing the burden of compliance.

Barua said SEBI has revised its mutual fund sponsorship requirements, which enables entities in sound financial conditions, including private equity funds, to become sponsors without a mandatory profit history.

Investors can easily access comprehensive information about the program’s portfolio, including its performance and holdings, on the fund’s website. In addition, SEBI mandates regular disclosure of portfolio details for debt funds every 15 days. This transparency enables investors to make informed decisions and helps ensure fair treatment.

To further enhance liquidity in the debt market and address concentration risks, SEBI has implemented prudential regulations for open-ended mutual funds, especially debt funds. He added, “These regulations include minimum liquidity precautionary requirements, restrictions on investments in one company or sector, and self-testing to assess the impact of market movements on the fund’s net asset value.”

Demat for MFs

Many mutual fund investors have a demat account but choose not to receive mutual funds in a dematerial form, said Samar Benawat, executive director of the National Securities Depository.

He added that by choosing a demat account to hold mutual funds, investors can benefit from a centralized process and have a single point of contact – the custodial participant – for all matters relating to their assets.

Furthermore, mutual fund units held in a demat account can act as collateral, allowing clients to collateralize the units and obtain loans against them. He said it can also be used as collateral for trading through non-margin facilities.