Sebi says no to mutual funds for cryptos. What are your alternatives?

However, the markets regulator had approved Invesco’s Blockchain ETF Fund of Fund (FoF). But the MF company has said it would not go ahead with the fund until there is regulatory certainty. The FoF was set up to provide Indian investors a route for investing in such new-age companies listed abroad. Following the withdrawal of the launch by Invesco, Sebi Chairman Ajay Tyagi said mutual fund companies in India cannot come up with blockchain and crypto funds till regulations are clear. Navi Mutual Fund also recently filed a draft with Sebi for a blockchain index fund that will track the Indxx Blockchain Index, a gauge for companies involved in that ecosystem.

The delay in the launch of crypto-related mutual funds is a setback for investors looking to diversify their portfolios using the riskier asset class.

Although a blockchain-specific ETF would have been a massive step in the adoption of cryptos in India, the withdrawal does not necessarily impact the current situation, says Edul Patel, CEO & Co-founder, Mudrex. “Investors are aware that there are still regulatory grey areas that need to be attended to for the space to mature.”

Market analysts say mutual fund players are all geared up to invest in new-age asset classes, thanks to the rising demand for such products. However, they are waiting for regulators to give the go-ahead. There are more than 13,000 tokens but limited knowledge about this segment. If mutual funds enter this area, it will be a huge booster for the crypto ecosystem, they add.

Sebi is awaiting clarification from the government and for the crypto bill before allowing mutual funds to invest in crypto assets, says Vikram Subburaj, Co-founder and CEO of Giottus Cryptocurrency Exchange. “We anticipate the government to submit the crypto bill in February after which the floodgates for mutual funds and other institutions to offer crypto products would open for retail investors,” he adds.

The government had proposed a cryptocurrency bill in the budget session of Parliament. But it is not clear when the legislation would be approved.

The Reserve Bank of India (RBI) has been quite vocal in criticising private cryptocurrencies as being prone to frauds and being highly volatile assets.

Industry veterans point out that this asset class lacks legitimate recognition. However, one can buy and sell crypto through various platforms.

Sethurathnam Ravi, Managing Partner of Ravi Rajan & Co and former Chairman of BSE, says there is no regulatory framework to start using cryptos. “Investors have been using it at their own risk and most of the investors are wary of this. So I don’t think there will be much jitters among investors.”

Investors can also navigate this space via themes such as DeFi, Metaverse, NFTs and more, which can be thought of as an alternative to mutual funds, says Subburaj. “Baskets can be a list of large caps, DeFi, metaverse, memecoins.”

Despite the wide offerings and trouble-free access to such products, investors need to be cautious as these products demand more discipline and understanding. “Coins sets are similar to mutual funds but they are periodically rebalanced and not actively managed by fund managers. Hence these cannot be called mutual funds,” Patel says.

Millennial investors add crypto to their portfolio as an additional layer of diversification, with a potential to generate higher alpha. Market experts say the risk appetite of one investor will be different from another. They suggest investors not hold more than 5-10 per cent of their investment in crypto assets. Dabble in digital tokens only if you are aware of the functionality of cryptos and the associated risks, warn market experts.

“It is unregulated, unbacked by any financial institution or government bodies in India, prone to hacking and highly volatile,” says S Ravi.