Mutual funds' new-age technology schemes prove to be a non-starter

Despite several innovative tech FoF applications with Sebi, only one hits the market

Until a few months ago, asset management companies (AMCs) were gung-ho about new-age investment themes, seeking to launch passive schemes that invest in companies dealing in blockchain, internet of things (IoT), artificial intelligence (AI), and cloud computing.

Between October 2021 and May 2022, AMCs filed papers for 10 such schemes with the regulator -- most of them slated to invest in international exchange-traded funds (ETFs) focused on these technologies. But even as 2022 is now drawing to a close, only one of these schemes has managed to hit the market.

 The papers filed with the Securities and Exchange Board of India (Sebi) during the period include three fund of funds (FoFs) each by Navi Mutual Fund (blockchain, metaverse and IoT), and Mirae Asset MF (AI and technology, global clean energy and cloud computing). Aditya Birla Sun Life (ABSL) MF filed applications for two FoFs (blockchain & virtual digital assets and futuristic healthcare), and so did Nippon India MF (AI, and electric vehicle). Mirae Asset MF’s AI and technology ETF FoF is the only scheme among these that was launched.

According to MF officials, a majority of these schemes are stuck due to regulatory hurdles. In January, Sebi restricted MFs from investing in foreign securities and funds as the industry came close to breaching the $7-billion foreign investment limit. The ETF route was kept open as the industry has an additional ETF investment limit of $1 billion. Among the planned ETF FoFs, some are pending with Sebi for approval. The rest have been shelved as investor sentiment turned sour for technology stocks after a major correction.

 “Restrictions on foreign investments are the major reason. Other than that, it seems like some fund houses may have shelved their NFO plans in search of better timing to launch such schemes,” said a mutual fund’s chief executive officer (CEO).

 A top executive of another fund house said a lot has changed for technology companies, especially for those with limited cash flow, between early-2022 and end-2022. “The US is no longer in a zero-interest rate environment. The interest rate has climbed up to almost 4 per cent. This has changed the whole valuation mechanism for technology companies in the US, leading to a correction in the prices of these stocks,” he said.

 Another regulation proved to be ill-timed for these technology NFOs. In March, Sebi had put a 3-month (April to June) ban on the launch of new products by fund houses, owing to their failure to implement some of the new regulations on time. As rate hikes started across the globe during this time, a lot changed for technology stocks by the time the ban came to an end.

 Reportedly, Sebi also turned more cautious when approving innovative funds after the Invesco MF blockchain fund incident in November 2021. Invesco MF was all set to launch India's first blockchain fund, the CoinShares Global Blockchain ETF FoF, after getting Sebi's approval but deferred the plan, citing evolving regulatory framework. A month later, the then chief of Sebi Ajay Tyagi stated that MFs can't invest in crypto-related products until there is a law for such digital assets in India. 

 The fact that MFs have not filed papers for any technology fund since May 2022 also shows that fund houses do not think the present scenario is right for investment in tech companies. HSBC MF was the last to file a domestic technology fund in May called the Innovator, Disruptor, Adaptor and Enabler Equity Fund (I.D.E.A), but even that hasn't been launched.

 Foreign ETFs in the 'new age' tech space have seen a major correction after March 2022 as the US started to hike rates. For example, ETFs like Roundhill Ball Metaverse, Amplify Transformational Data Sharing, and Siren Nasdaq NexGen Economy ETF are down 50-70 per cent in a year.