Should You Invest in Mutual Funds Betting on Blockchain Technology and Cryptos?
November 23, 2021 Mutual Fund
Greed and fear are the two psychological factors that drive the capital markets and affect individual and institutional investors alike. Even professional money managers such as mutual funds sometimes find it difficult to resist the FOMO (Fear of Missing Out) trait.
The emergence of next-generation technologies and digital adoption of businesses are the two most popular investment themes attracting investors globally at present. Blockchain technology, for instance, has introduced many investors to the world of cryptocurrencies.
As per investopedia.com, crypto in cryptocurrencies refers to complicated cryptography that allows the creation and processing of digital currencies and their transactions across decentralized systems. Thus, cryptocurrencies are also referred to as virtual or digital money in form of coins or tokens.
Bitcoins, Binance Coin, Ethereum, Tether, Cardano, and Solana, are some of the most popular cryptocurrencies (as per CoinMarketCap) that exist today, and many of them have delivered mindboggling returns in a very short period of time. This has enticed a lot of investors, including mutual funds.
Recently, Invesco (India) Mutual Fund announced the launch of its new fund — Invesco CoinShares Global Blockchain ETF Fund of Fund — after a nod from the capital market regulator, SEBI. The permission was given despite no regulations in India for cryptocurrencies. But soon enough, Invesco Mutual Fund put this fund launch on a hold or backburner owing to regulatory concerns. In its media representations, Invesco Mutual Fund has cited potential legislative changes in India pertaining to crypto-assets and likely uncertainty thereof as the primary reason.
Invesco (India) Mutual Fund was planning to launch Invesco India-Invesco CoinShares Global Blockchain ETF Fund of Fund (FoF) on November 24, 2021. The investment objective of the scheme was to generate returns by investing predominantly in units of Invesco CoinShares Global Blockchain UCITS ETF, an overseas Exchange Traded Fund — referred to as the underlying fund — that seeks to achieve the performance of the CoinShares Blockchain Global Equity Index (the Reference Index) less fees, expenses and transaction costs.
Invesco CoinShares Global Blockchain UCITS ETF, incepted in March 2019 has Assets Under Management (AUM) worth USD 983.18 million as of November 19, 2021, and invests across industries and geographies. The top-5 regions it invests in are the U.S., U.K., developed part of Europe, Asia, and Japan.
Although the underlying fund hasn’t been betting actively on cryptocurrencies, it has significant exposure to listed crypto infrastructure companies. For example, the fund’s core holdings are Coinbase Global Inc., Bitfarms Ltd., Monex Group Inc., GMO Internet Inc., Hive Blockchain Technologies Ltd. Taiwan Semiconductor amongst others, many of which are in the technology sector, communication services, and financial services whose business operations provide infrastructure to crypto-economy. Their fate is closely tied to that of cryptocurrencies.
You would be surprised to know, Coinbase has over 7.3 crore users spread across more than 100 countries. Coinbase allows users to invest, spend, store, and earn cryptocurrencies. Whereas Hive is a crypto mining company that mines Bitcoin and Ethereum.
Technocrats believe blockchain technology is still in its nascent stages of development and can find applications in diverse industries right from agriculture to internet advertising. Since data blocks are sequential and stored in every computer on the network, it’s impossible to remotely alter data once recorded. Thus, blockchain eliminates the need for third-party validation. Blockchain technology allows decentralized recording keeping of transactions across the network. When properly implemented, the blockchain enhances transparency, traceability and security of data. Moreover, it offers cost savings and delivers efficiency.
Having said that, it raises concerns when fund house such as Invesco does not adopt a very diligent approach when launching a high-risk thematic fund. Broadly speaking, investing in Invesco India – Invesco CoinShares Global Blockchain ETF Fund of Fund should have assessed if enough regulations exist and then may be considered launch. Currently, such schemes are riskier than any technology sector fund.
The RBI has been warning against risks involved in crypto assets for a long time now. The central bank after internal deliberations has made serious concerns about macroeconomic, monetary, and financial stability with cryptocurrencies. Besides, the alleged role of cryptocurrencies in money laundering and terror funding has been a topic of discussion for quite a while now.
Is it that the fund houses only recognize the seriousness of the situation when they see the government moving to regulate crypto assets? Currently, only the U.K., Ukraine, Singapore, Indonesia, and Canada are among the few countries that have regulated cryptocurrencies. The countries that have proposed to regulate cryptocurrencies are the United States of America (USA), Brazil, and India to name a few. On the other hand, countries like China, Algeria, and Bangladesh, have banned cryptocurrencies.
It is true that blockchain technology is much bigger than the cryptocurrency ecosystem and cryptocurrencies are just one part of it. But it is equally true that if cryptocurrencies nosedive someday for any reason, including regulatory changes across geographies, the popularity of blockchain technology might take a severe beating.
It is unfortunate that instead of cautioning investors against following such market fads, some mutual fund houses are capitalising on the excitement for cryptocurrencies; striking while the iron is hot.
I would like to caution you, the investors, not to get carried away by the marketing literature of mutual funds betting heavily on the crypto ecosystem, cryptocurrencies and blockchain technology. You would do better staying away from such schemes. If looking at the extraordinary returns or jaw-dropping rallies of certain cryptocurrencies is encouraging you to invest your hard-earned money, it is an imprudent approach. All that shines and goes up quickly isn’t gold and holds the propensity to descend as well. Investing in cryptocurrencies and mutual funds investing in blockchain technology is a very high-risk proposition.
At PersonalFN, we have been time and again continually cautioning you to stay away from the sector and thematic funds. They carry too much risk and the returns do not always commensurate with the kind of risk taken.
You need not take unwarranted risks or invest in fancy themes to outperform markets. Instead, what you require to do is devise a sensible and time-tested investment strategy. The Core & Satellite Investment strategy is followed by some of the most successful investors.
The term ‘Core’ applies to the more stable, long-term holdings of the portfolio, while the term ‘Satellite’ applies to the strategic portion that would help boost the overall returns of the portfolio, across market conditions.
When you construct a portfolio of equity mutual fund schemes with strategy, the ‘Core’ holding should comprise around 65-70% of your equity mutual fund portfolio and consist of a Large-cap Fund, Flexi-cap Fund, and Value Fund/Contra Fund. Whereas, the ‘Satellite’ holdings of the portfolio can be around 30-35% comprising of a Mid-cap Fund and an Aggressive Hybrid Fund.
By wisely structuring and timely reviewing the Core and Satellite portions and the holdings therein, you would be able to add stability to the portfolio while strategically boosting your portfolio returns at the same time.
While you add equity mutual fund schemes to your investment portfolio based on the Core & Satellite strategy, here are a few fundamental rules to follow:
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Consider funds that have a strong track record of at least 5 years and have been amongst the top performers in their respective categories.
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The schemes should be diversified across investment styles and fund management.
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Ensure that each selected scheme abides with its stated objectives, indicated asset allocation, and investment style.
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You should not only invest across investment styles (such as growth and value) but also across fund houses.
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The mutual fund schemes should be managed by experienced and competent fund managers and belong to fund houses that have well-defined investment systems and processes in place.
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Not more than two schemes managed by the same fund manager should be included in the portfolio.
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Not more than two schemes from the same fund house shall be included in the portfolio.
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Each scheme that is to be included in the portfolio should have seen an outperformance over at least three market cycles.
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You should restrict the count of mutual fund schemes in your portfolio to seven or eight.
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You must have an investment time horizon of at least 5 to 6 years.
Given the uncertainty looming and that the Indian equity market would remain very volatile in the foreseeable future, I suggest opting for the Systematic Investment Plan (SIP) route while you build the portfolio of equity-oriented mutual fund schemes following the ‘Core and Satellite’ approach.
Moreover, do not forget to align your investments with your risk appetite, broader investment objective, financial goals, and time horizon to accomplish the envisioned financial goals.
If you sensibly follow the ‘Core & Satellite’ approach while investing in equity mutual funds, it will adduce the undermentioned six benefits:
- Facilitate optimal diversification among equity mutual fund schemes.
- Reduce the need to frequently churn your entire portfolio.
- Reduce the overall risk to your portfolio.
- Enable you to benefit from a variety of investment styles and strategies.
- Create wealth cushioning the downside.
- Help you potentially outperform the market.
Note, the Core & Satellite investment strategy may work for you in 2022 and beyond.
This article first appeared on PersonalFN here
