What Is MF-Lite? SEBI Introduces New Mutual Fund Category Under 2026 Regulations

In a sweeping overhaul of the mutual fund regulatory regime, the Securities and Exchange Board of India (SEBI) has notified the Securities and Exchange Board of India (Mutual Funds) Regulations, 2026, which introduces Mutual Fund-Lite (MF-Lite) as a separate category of mutual funds.

Notified on 14 January, the regulations have repealed the nearly three-decade-old SEBI (Mutual Funds) Regulations, 1996 and are scheduled to come into force with effect from 1 April 2026.

Under the new regime, while MF-Lite continues to fall within the overall regulatory framework applicable to mutual funds, it is regulated through a tailored set of provisions designed specifically for this category.

What is Mutual Fund-Lite?

A “mutual fund” is a trust-based investment vehicle that pools money from the public and invests it on behalf of investors across various asset classes such as equities, bonds and money market instruments.

The new regulations envisage MF-Lite as a mutual fund with a limited scope of operations. Unlike conventional mutual funds that can launch a wide range of schemes, MF-Lite is permitted to offer only specified schemes, including index funds, exchange-traded funds (ETFs), fund of funds and such other schemes as may be specified by SEBI.

Further, an MF-Lite can be set up only by an entity registered with SEBI under Chapter X of the 2026 Regulations, after satisfying the prescribed eligibility and registration criteria.

Scope Of The 2026 Regulations

Beyond the introduction of MF-Lite, the 2026 Regulations comprehensively govern the registration, eligibility, governance and functioning of mutual funds. They lay down detailed provisions applicable to sponsors, asset management companies, trustees and custodians, while strengthening standards of investor protection, transparency and disclosure.

The regulations also enhance eligibility criteria and governance norms for sponsors and AMCs. With respect to MF-Lite, separate eligibility and registration provisions underscore its recognition as a distinct category within the regulatory framework.

Compliance Relaxations

Regulation 56(1) states that the provisions of Chapter X apply specifically to MF-Lite and MF-Lite schemes. Regulation 56(2) further clarifies that while most provisions of the regulations apply to MF-Lite, certain specified provisions are expressly excluded.

The regulations introduce alternate eligibility routes, including one route without any experience requirement and another without a profitability requirement.

The regulations also prescribe lower net worth thresholds for MF-Lite asset management companies (AMCs). An MF-Lite AMC is required to maintain a net worth exceeding Rs. 50 crore, which may be reduced to Rs. 25 crore where the AMC has recorded profits for five consecutive years. Lock-in requirements are similarly relaxed, with no lock-in under one eligibility route and a three-year lock-in under the other.

The framework further permits sponsors to obtain a separate MF-Lite registration and allows the transfer or migration of eligible passive schemes from an existing mutual fund to an MF-Lite entity. Upon such transfer, the existing mutual fund is barred from launching passive schemes eligible for MF-Lite.

Investor Protection Measures

Despite the relaxed registration and compliance norms, the regulations retain and strengthen investor protection safeguards. Trustees are vested with explicit powers to supervise the conduct of the MF-Lite AMC, address conflicts of interest, review reports submitted by the AMC, and take corrective action where the AMC's conduct is detrimental to the interests of unit holders.

Regulation 63(8) mandates the establishment of an institutional mechanism to deter market abuse, including front-running and fraudulent transactions, along with a whistle-blower policy to protect employees and stakeholders reporting misconduct. The regulations also require the constitution of a Unit Holder Protection Committee by the MF-Lite AMC.

Repeal Of 1996 Regulations

With the notification of the 2026 Regulations, the long-standing SEBI (Mutual Funds) Regulations, 1996, which governed the mutual fund sector for nearly three decades, stand repealed.

Over the years, the 1996 framework had been supplemented by numerous amendments. The 2026 Regulations replace this regime with a consolidated and updated regulatory framework for the mutual fund industry.

Transition To New Framework

The regulations will come into force on 1 April 2026, providing market participants with a transition period to align with the new framework. Following the repeal of the 1996 Regulations, all mutual funds, sponsors, trustees and AMCs will be governed by the 2026 Regulations.