Tokenised funds split their assets under management into fractions, enabling a reduced minimum investment, making them more affordable for small investors.
The use of blockchain technology, which underpins cryptocurrencies, to support tokenised funds can also reduce operational costs, industry specialists say.
"With the ever-quickening pace of technological change, the investment management industry, regulator and policymakers must work together to drive forward innovation without delay," said Chris Cummings, chief executive of the Investment Association.
The government and the Financial Conduct Authority should establish a framework for tokenised funds to operate, the IA said in a statement.
Regulators should also assess the eligibility of cryptocurrencies in investment funds with well-diversifed portfolios, the IA added.
Abrdn is among major asset managers considering launching tokenised funds.
"We are looking at tokenisation and are currently assessing how the benefits of blockchain technology could be leveraged in the regulated funds space," an abrdn spokesperson said in an emailed statement.
"Tokenised solutions should provide new ways for both retail and sophisticated investors to access investment products, including in the illiquid space, thanks to lower investment minimums and improved liquidity mechanisms via secondary token markets."
Fund technology firm FundAdminChain is working with the London Stock Exchange and four asset managers on tokenised funds. FundAdminChain CEO Brian McNulty declined to name the managers.
Investors have since last year been able to buy tokens in a fund managed by private equity firm Partners Group through Singapore digital securities exchange ADDX. Investors can get in with an outlay of $10,000, rather than a typical minimum of $100,000.
However, the global Financial Stability Board has warned that tokenisation still leaves retail investors exposed to any underlying illiquid assets, like commercial property and private equity, which are hard to get out of in a hurry if prices fall.
(Reporting by Carolyn Cohn, editing by Huw Jones and Bernadette Baum)
By Carolyn Cohn