Should You Invest in Navi Mutual Fund’s Upcoming Blockchain Fund?

Blockchain is one of the most stirring fintech trends at the moment, it is known as the technology that underpins Bitcoin and cryptocurrencies. Bitcoin is the world's first and largest cryptocurrency, but it is not the only version of cryptocurrency. Several other cryptocurrencies such as Binance Coin, Ethereum, Tether, Litecoin, Stellar, Cardano, Solana, Dogecoin, etc. exist today.

Given that, blockchain technology was originally created to make Bitcoin a reality, it now has a much broader use than that. Blockchain technology works like a massive digital spreadsheet or ledger in which every transaction is recorded. It is a digital ledger of transactions that is duplicated and distributed across the entire network of computer systems on the blockchain.

Given the growth of increase in blockchain adoption globally, Indian policymakers have grasped its potential and they are exploring this distributed ledger technology in multiple domains such as asset registration, maintaining records, benefit transfers, and so on. With organizations, start-ups, and blockchain developers working on a variety of blockchain use cases across industries, the future of blockchain technology seems bright. State governments are collaborating with start-ups and technology giants. The Government of Maharashtra, too, has been evaluating blockchain technology for applications in e-governance.

The financial sector (fintech) is at the forefront of blockchain and smart contracts adoption, with various businesses engaging in services relating to cryptocurrencies and other digital assets (e.g. asset management, trading and exchange services, custody and storage solutions). Recent news reports have stated that the government will not be banning cryptocurrencies. In 2018, the Reserve Bank of India effectively banned crypto assets, and the Supreme Court overturned the ban in 2020, allowing investors to access the crypto markets. Blockchain is the technology that enables the existence of cryptocurrency; these currencies are not backed by the government, they are decentralised.

The legality of cryptocurrencies in India has been in a grey space; although the Indian government is not looking to ban cryptocurrencies. They may create a framework to regulate the highly risky virtual assets for investors. All the Indian crypto exchanges may reportedly come under the purview of the Securities Exchange Board of India (SEBI). Currently, the government is working on a bill that will regulate crypto trading and will set rules on how cryptocurrency exchanges will operate.

The introduction of the cryptocurrency regulation bill initially triggered panic amongst crypto investors. Finance Minister Ms Nirmala Sitharaman shared a crucial update on the government's cryptocurrency bill, stating that the new bill has been reworked and it may not be aimed to completely ban cryptocurrencies in India.

Later on December 6, 2021, the Union Minister of State in the Ministry of Finance, Mr Pankaj Chaudhary said, "The government has no plans of boosting the cryptocurrency sector in India. Currently, cryptocurrencies are unregulated in India and the government does not collect data on the cryptocurrency sector. A bill on cryptocurrency and regulation of official digital currency has been included for introduction in the Lok-Sabha Bulletin - Part II as part of the government business expected to be taken up during the seventh session of seventeenth Lok Sabha 2021."

The RBI has not stated that cryptos are illegal but has raised concerns. "When the RBI, after due internal deliberation, says that there are serious concerns on macro-economic and financial stability with cryptocurrencies, there are deeper issues, which need much deeper discussions and much more well-informed discussions," said RBI Governor Shaktikanta Das at an event recently.

So far only a few countries have accepted cryptocurrencies as legal tender. Despite the policymakers' scepticism about cryptocurrencies, progressive Indian states and businesses are already studying the different possibilities of blockchain technology, and several entrepreneurs are stepping up to put their ideas into action.

When it comes to investing, Indian investors will now be able to participate in the emerging blockchain industry growing worldwide through mutual funds.

Recently, Navi Mutual Fund backed by Mr Sachin Bansal (co-founder of Flipkart) has filed a draft document to file a blockchain fund -- Navi Blockchain Index Fund of Fund -- even as there exists uncertainty related to cryptocurrencies that are closely linked to blockchain technology.

The Navi Blockchain Index Fund of Fund will invest in units of overseas ETF's and/or Index Fund that invest in the Indxx Blockchain Index.

The underlying index of the scheme, the 'Indxx Blockchain Index', is designed to track the performance of companies that are either actively using, investing in, developing, or have products that are poised to benefit from blockchain technology.

"The index seeks to include only companies that have devoted material resources or made material commitments to the use of blockchain technologies", as per information available on the Indxx website. It counts companies like Advanced Micro Devices (AMD), Nvidia Corp, Salesforce.com Inc, Samsung, IBM, and Oracle among its top holdings. It has 100 stocks overall, and the list includes Indian companies like Infosys, Wipro, TCS, and Kotak Mahindra Bank as well.

The fund allows investors an opportunity to have exposure to blockchain technology and leverage the potential offered by this revolutionary technology. Investors seeking to invest in blockchain technology but do not hold a risk appetite to invest directly may consider investing in such themes indirectly through mutual funds.

However, it is suggested that only high-risk investors may consider these blockchain funds if it is approved by SEBI and only after ensuring your suitability to the fund to your risk profile and other needs when sufficient information is available.

To conclude...

The crypto space has been growing in India with the growth of blockchain technology, however, there are many risks involved.

Although blockchain technology is much wider and India is moving beyond the nascent stage today and exploring the benefits of blockchain technology at a larger scale, it is still prone to higher risks. In case the cryptocurrencies, which are supported by blockchain technology, crash due to any uncertain event or regulatory changes or for any reason, it will directly impact the popularity of blockchain technology. Currently, there are risks involved with issues regarding money laundering and terror funding with cryptocurrencies.

At this point, blockchain technology and cryptocurrencies are emerging. No doubt it is gaining traction amongst investors, especially young millennial investors. But we need to wait and watch for now since it is a highly risky investment proposition.

The biggest challenge here is the lack of awareness about blockchain technology. Many investors are unaware of the risks involved when investing in these virtual assets. Ensure that you do not fall into the trap of jumping onboard every market fad relating to cryptos and blockchain technology investments. Take steps to become financially aware and enhance your financial knowledge to make the right investment decisions for your financial well-being.

Happy Investing!

Frequently Asked Questions (FAQs)

1. What is Blockchain technology?

Blockchain technology works like a massive digital ledger in which every financial transaction is recorded. Think of it the same way as you would record an accounting ledger book or a cash book with all financial transactions.

2. What is Blockchain Fund?

A blockchain fund is used to invest in companies involved with the transformation of business applications through blockchain innovation. Blockchain Index fund/ETFs are funds that invest in a basket of companies that use blockchain technology for operations.

3. How can I invest in Blockchain technology?

You may directly purchase cryptocurrencies, such as Bitcoin, or invest in an exchange-traded fund (Index fund/ETF) that specifically invests in shares of companies with exposure to blockchain.

4. Are cryptocurrencies different from blockchain?

Blockchains are designed to use cryptocurrencies as the "ink" for writing records on the blockchain ecosystem. Cryptocurrencies are therefore different from blockchain, but, yet, an integral part of blockchain technology.

5. What is Distributed Ledger Technology (DLT)?

Distributed ledger technology is a broad category that encompasses blockchain technology. Instead of accounting for data through one centralized computer, distributed ledger technology uses many participants in a network to maintain a digital record.

Warm Regards,
Mitali Dhoke
Jr. Research Analyst

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