Passive Mutual Funds

GS Paper III Economy

Securities and Exchange Board of India (SEBI) introduced the liberalised Mutual Funds Lite (MF Lite) framework for passively managed schemes.

About MF Lite

It presents diversified investment opportunities for retail investors through less risky schemes and enhance market
Easier Entry for New Players: It lowers entry barriers, allowing more companies to offer passive mutual funds by relaxing net worth, profitability, and track record requirements.
Simplified Role for Trustees: SEBI reduces oversight for trustees managing passive funds, lowering compliance costs due to the simpler nature of passively managed schemes.
Faster Approval Process: It streamlines the approval process, cutting down on paperwork, enabling companies to launch funds faster.
Options for Existing AMCs: Existing companies can either manage passive funds under MF Lite or continue with their current setup, benefiting from regulatory flexibility.
Impact on Investors: Investors will gain access to more passive investment products, potentially improving returns, lowering costs, and boosting liquidity.

A mutual fund is a pool of money managed by a professional Fund Manager.
It is a trust that collects money from a number of investors who share a common investment objective and invests the same in equities, bonds, money market instruments and/or other securities.
They are ideal for investors who either lack large sums for investment, or for those who neither have the inclination nor the time to research the market, yet want to grow their wealth.

Passive mutual funds are investment funds that aim to replicate the performance of a specific market index rather than trying to outperform it
They usually track a benchmark index, say BSE Sensex or Nifty50, and try to mimic their performance.
- Actively managed funds: Fund managers make buy-and-sell decisions based on market analysis and research
- Passive mutual funds :Follow a buy-and-hold strategy based on an index.
Pros and Cons of Passive MF:

Pros	Cons
Easily tracked: Since the underlying constituents of the benchmark indices are publicly available, passively managed schemes can be easily tracked and therefore less risky.	No Outperformance: Designed to match, not to beat, the market. It limits the potential for higher returns that active fund managers might achieve.
Predictability: Since they follow an index, the returns of passive funds are predictable, reflecting the overall market or sector they track.	Lack of Flexibility: Must stick to their index even during market downturns, which may expose investors to losses.

Must Read
UPSC Daily Editorials	UPSC Daily Current Affairs
Check Out UPSC NCERT Textbooks From PW Store	Check Out UPSC Modules From PW Store
Check Out Previous Years Papers From PW Store	UPSC Test Series 2024
Daily Current Affairs Quiz	Daily Main Answer Writing
Check Out UPSC CSE Books From PW Store