How blockchain could transform mutual fund ownership in India

Tokenisation of mutual funds can be thought of as converting paper-based unit statements into secure, digital, tradable assets. The blockchain ledger ensures that everyone in the chain sees the same version of truth—both transparently and securely. The blockchain ledger records all transactions permanently, prevents fraudulent transfers and provides full auditability for regulators and fund houses.

Lessons from Hong Kong’s blockchain pilot

The pilot project in Hong Kong, particularly led by HSBC Asset Management, Ant Group, and others under the Hong Kong Monetary Authority (HKMA)’s Fintech Supervisory Sandbox, offers valuable insights for India as it considers blockchain for mutual fund distribution and ownership transfer. It is possible to tokenise Mutual Fund units securely and manage them across platforms. Asset Management Company (AMCs) and Registrar and Transfer Agent (RTAs) can adopt Distributed Ledger Technology, i.e. DLT-based tokenisation, without a complete system overhaul. Scalability can be achieved in phases (starting with closed-end or money market funds).

Smart contracts: The key to automation and cost savings

In fact, the Hong Kong pilot showed that smart contracts can easily automate subscriptions, redemptions, and distributions, and handle compliance, i.e. KYC (Know Your Customer) and AML (Anti Money Laundering) checks without manual intervention. This has key implications for India—Smart contracts can reduce back-office costs and enable instant T+0 settlement, bypassing traditional RTAs for certain fund types. When mutual fund ownership is moved to a DLT-based system, KYC/AML can be embedded as smart contract layers, enabling Auto-verification of KYC status from blockchain identity nodes, real-time AML alerts on suspicious wallet behaviour, and permissioned access only for verified wallets (whitelisting).

Interoperability: Why India's ecosystem must work together

HKMA’s pilot stressed on systems being interoperable, i.e. able to talk to each other — between asset managers, distributors, custodians, and regulators. It therefore implies that India’s fund ecosystem (AMCs, Sebi, RTA, KRA, NSE/BSE) must adopt shared DLT protocols or APIs. Working in silos would be disastrous. The HK pilot involved banks, fintechs, fund houses, and the regulator working together. Therefore, no single AMC or distributor in India should attempt to go solo. Instead, a consortium model (AMFI, AMCs, RTAs, fintechs) could foster innovation and manage risk.

Investor transparency and trust through blockchain

Investors in Hong Kong could view real-time fund NAVs, ownership status, and transaction logs directly on a blockchain viewer. Hence, from an Indian perspective, this could radically improve investor confidence in the mutual fund industry, especially after events like the Franklin Templeton debt fund closure.

KYC, digiLocker and self-sovereign identity on blockchain

In the Hong Kong project, self-sovereign identity models allowed investors to carry their KYC across platforms. The good news, therefore, for India, is that integrating DigiLocker or Aadhaar-linked KYC on a blockchain could make onboarding fast, secure, and reusable across AMCs. Further, integrating tokenised mutual funds into apps like Paytm, Zerodha, or even UPI-linked platforms can help reach our investors more efficiently. In fact, blockchain should run in the background — the user interface must feel like any other mutual fund app.

A phased rollout: Start with low-risk funds

The initial focus for rolling out could be on low-risk funds. Perhaps it would be a good idea to start with debt or overnight funds to test the system before rolling out for equity funds. If executed carefully, the entire MF market can experience improved liquidity, lower operational costs, and reduced settlement risks.

Views expressed are personal. Dr. Vishwanathan Iyer is a Senior Associate Professor, Finance & Accreditation, Finance & Accounting at Great Lakes Institute of Management, Chennai.