IDFC Mutual Fund recently rolled out its IDFC US Treasury Bond 0-1-year Fund of Fund. The offer opened for public subscription on March 10, 2023, and will close on March 23, 2023.
The idea behind the launch of this program is to offer investors much-needed exposure to US government debt, thus, carrying very little credit risk.
The scheme's performance will be evaluated against the ICE 0-1 Year US Treasury Securities Index benchmark. This is the first time that such a mutual fund scheme has been launched. Before this, other asset management companies in India have yet to come out with funds allowing investors to park their earnings in foreign treasury bonds, albeit through the fund.
What do analysts think?
A tête-à-tête with personal financial analysts reveals their views on whether or not investors must opt for this fund. Also, this being a new fund offer (NFO) has prompted many investors to inquire if it is worth their money.
Dev Ashish, Founder, Stable Investor, said, “The 1-year US treasury yields have spiked from almost 0.1 per cent a couple of years back to almost five per cent now. So, getting a five per cent return from a USD-denominated and perceived-to-be-ultra-safe instrument is attractive. Add to it that the depreciating Rupee might add to returns further, and this offering does seem to be attractive, for now. But let’s not forget that the yield spike is a recent phenomenon and its sustainability is not given in the long term.”
Ashish adds, “So the FOF relies on generating returns for Indian investors via high yields and INR depreciation. While gradual depreciation of INR can still be relied on, a high yield of US debt is not that reliable a factor. So very soon, the high US yields will start reversing. Remember that inflation and interest rate handling by the central government are cyclical. So, if something is high now will come down eventually. So, when the yields come down to historical averages, the only thing left over will be the currency depreciation card for the fund. And Rupee depreciation is also not a guarantee.”
He further explained, “So all said and done, apart from the novelty aspect, there is not enough for most Indian investors to consider this. Far simpler options are already available for Indians within the Indian debt fund space. The ultra-short debt funds, money-market funds, etc. are good enough for most investors. There is no urgent need to allocate to US short-term debt with so many underlying assumptions in the name of geographical diversification or recency bias of relying on high near-term yields.”
Suresh Sadagopan, MD & Principal Officer, Ladder7 Wealth Planners said, “IDFC US Treasury Bond 0-1-year FOF is investing in the 0-1-year tenures in an open-ended format should do well considering the inverted yield curve as of now. The situation is volatile and the interest rate trajectory, inflation pathway in the future etc. will determine the yield from this fund. These are the risk factors. This fund will provide higher yields due to continued rupee depreciation (if it happens) but will be subjected to regular tax rates in a short-term capital gains period of up to 36 months which could bring down returns. It will be significantly better when the holding period goes beyond 36 months.”
Rajani Tandale, Product Head – Mutual Fund, 1finance.co.in, said, “The IDFC US Treasury Bonds Fund offers investors the opportunity to invest in US Treasury Bonds with a one-year maturity. These bonds typically yield around 4.6-4.8 per cent, which may be lower than the yield of one-year Indian Government Securities (G-secs) that yield more than seven per cent. However, investors should be aware that bringing this money back to India could result in debt taxation that could significantly reduce their returns.”
Tandale added, “There are two potential scenarios that could benefit the performance of this fund. First, if there is a sharp fall in US interest rates, it could result in mark-to-market gains for the fund. However, this is unpredictable given the current economic conditions in the US. Second, if the rupee depreciates over the next one to three years, it could also benefit the fund's yield,” adding, “Investors who are looking to diversify their investment portfolio to the US market which offers low-risk and low volatility, and a convenient way to invest in rupees and earn dollar-denominated returns, or to hedge your dollar exposure. Always seek qualified financial advice before investing.”
However, Mayur Shah, SEBI Registered Investment Advisor and Certified Financial Planner has mixed views on the same. Shah says, “We prefer funds having a minimum of three years of existence; hence Investors can avoid this IDFC’s US Debt Fund new fund offer. When we think of debt, it’s about safety. There is also an exchange rate risk that may make this fund very volatile. In an attempt to stabilize the US economy after Covid-19, the US Fed has done an exponential rate hike which made the US short-term debt market very lucrative but looking at the history it may not continue for long.”
This is the first kind of fund being launched in the country, which means there is no way the investors can gauge or assess how this fund can perform in the long run. The concern is that this is a new fund offer (NFO), which means that investors have no clue how this fund’s returns would be in sync with their financial goals. Without parameters like previous year earnings, standard deviation, portfolio turnover, expense ratio, etc., inclined investors will not know how to evaluate this fund or whether it is worth considering. Parking your earnings in this fund may or may not yield the desired results; this coupled with the short investment tenure that many investors may opt for without realizing how their returns may not only be subject to market volatility and short-term capital gains tax too.
You must think twice before deciding on a new fund in your investment portfolio. Investing money may seem like a cakewalk to most unaware of the factors and intricacies governing them. There are many facets to investing and the best way to decide how, when and where to put money is to learn how investments work, which of them suit you best and under what conditions only some are worth considering in the end. Ultimately, it all boils down to your financial goals, your ability to digest risk, and the idea of financial independence in the long run.