Sebi moves to deepen liquidity in passive funds

Mumbai: Markets regulator Securities and Exchange Board of India (Sebi) has come up with a series of measures to improve liquidity in passive funds and make them more transparent to increase retail investor participation and make it easy for them to buy these products.

Currently, many exchange-traded funds (ETFs) are illiquid, deterring investors from buying them as the spreads are high. To address this, Sebi has said that every fund house shall appoint at least two market makers, to provide continuous liquidity on the stock exchange platform.

In addition, direct transactions with the fund house will be facilitated for investors for amounts greater than ₹25 crore. "This will push a lot of transactions on exchanges, thereby increasing demand and supply and is structurally good for liquidity," said Niranjan Awasthi, head-product, Edelweiss MF.


Sebi has also specified that the iNAV (indicative net asset value) has to be disclosed continuously - with 15 second lag for equity ETFs and at least four times a day for debt ETFs.

Mutual fund investors looking to save tax will now also get a chance to invest in a passive fund, with the regulator allowing fund houses to launch such a passive equity-linked savings scheme or ELSS. However, a fund house can choose only one among active or passive ELSS.

Sebi has also reduced the expense ratio to be spent on investor awareness programme (IAP) in the case of passive funds from 2 basis points to 1 basis point, bringing down costs.

The regulator has also laid guidelines on how debt passive funds should be managed so that it replicates a diversified underlying index.

Where the index has 80% exposure to corporate debt securities, the single issuer limit on AAA-rated securities is set at 15%, for AA-rated securities, 12.5% and A-rated securities shall not have weights of more than 10% in an index. For an index based on G-Sec and state government bonds, a single issuer limit shall not be applicable.