The curious case of India’s first crypto mutual fund

Unlike mutual funds, this particular fund is neither regulated by the Securities and Exchange Board of India, nor governed by the many rules that safeguard ordinary investors in mutual funds.

The BGCI Index, which is designed to measure the performance of some of the largest cryptocurrencies including Bitcoin, Ethereum, Solana, and Polygon, has delivered 500% returns since January 2020. 

“Looking at the growth of Mutual Fund AUM in India, we felt that replicating the same model would provide more comfort and confidence for those potential investors to take their first step in crypto investing,” said Zakhil Suresh, a co-founder of Bitsave. He also manages the BitSave Crypto Index product.

“We also wanted to solve the problem of transparency and the lack of support on existing platforms, which is affecting the growth of crypto as an investable asset class,” he added. “So by leveraging the openness of blockchain, we have built BitSave with 100% visibility of asset holdings directly on the blockchain.”

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The lack of regulation, however, places investors heavily at risk in this type of instrument. This risk is on top of the massive price volatility of crypto and the risk of hacking associated with it.

How it works

An investor needs to register on the BitSave app, complete the customer verification requirements, and then deposit an amount in rupees via UPI, which will immediately be converted to USDT, which is also known as Tether, a cryptocurrency stablecoin, where the value of a digital asset is pegged to something like a fiat currency, in this case the US dollar. 

Investors also have the option to directly transfer USDT tokens to their BitSave wallet. These USDT tokens are then transferred to a Seychelles entity owned by BitSave. The USDT is then converted to other tokens on cryptocurrency exchange Binance in the same weight as it’s mentioned in the index. 

Bloomberg rebalances its index monthly and all coins will have a weight in the range of 1-35%.

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Investors on BitSave are issued a custom token on Polygon. This token gets priced on a daily basis as per the net asset value of the Crypto Mutual Fund holdings present in Seychelles, and is shown to the investor on the BitSave app. 

The net asset value is calculated every day based on the net present value of the underlying assets divided by the total outstanding units. If the total value of the underlying assets is $200,000 and the total outstanding units are 100,000, then the NAV for the day would be $2.00. 

BitSave charges 1.5% as expense ratio, which gets deducted daily from the NAV. An investor can choose to exit the mutual fund anytime, but an exit load of 1% is charged if an investor exits within 30 days of investment. If an exit is initiated, the Seychelles entity would be instructed to sell the tokens in the fund and return the USDT back to the Indian entity, which the user can convert back into rupees. 

A 1% tax would be deducted at source for all transactions, as per Indian taxation laws. From a taxation stand point, because the investor only gets issued one token by BitSave, they need to pay any capital gains taxes on that token and not on the multiple tokens that are bought and sold out of the Seychelles entity, according to the startup.

High risk factors

BitSave currently offers three products—the one that replicates the BGCI Index; BitSave Crypto and Gold Product, which has around 30% exposure to the Pax Gold (PAXG) token, which is backed by physical gold; and ‘BitSave Bitcoin Product’, which has 100% allocation to Bitcoin. The expense ratio of these products range between 0.95% and 1.5%.

Crypto is still very much unregulated in India, but there are rules on taxation, customer verification, transaction monitoring, and reporting. 

Also read | Why India’s targeting Binance, other offshore crypto exchanges

Crypto assets are also unregulated in Seychelles, where BitSave operates. However, the Financial Service Authority of Seychelles has prepared a draft bill to regulate the industry, and it is expected to be passed in the assembly later this year. 

BitSave expects to apply for a crypto asset management licence once the bill is passed and the guidelines issued.

Cryptocurrency is an extremely volatile investment. People investing in products linked to it place themselves at risk not only in terms of price volatility but also of the intermediary failing. 

In July 2022, a crypto lender called Vauld went bust in Singapore. It had been heavily promoted in India by influencers as being similar to fixed deposits. Investors should be highly cognizant of these risks while approaching such investments.

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