IDFC MF set to launch India’s first international debt fund

IDFC Mutual Fund (MF) a fund house known for its debt funds is all set to launch IDFC US Treasury Bond 0-1 Year FOF (Fund of Funds), the industry’s first international debt fund. This opens doors for Indian retail investors to gain access to ultra-safe and currently high-yielding US Treasury securities, and also hedge their exposure to the dollar in a convenient manner. This gives investors an opportunity to diversify out of India and into US Treasuries, which are seen as a safe-haven asset in times of economic uncertainty. 
 
The FOF will invest in the JP Morgan Betabuilders US Treasury Bond 0-1 Year UCITS ETF, an exchange-traded fund with exposure to 0-1 Year US Treasuries. The FoF will have 100% exposure to US Treasuries, except for certain cash holdings for liquidity needs. 
 
On a rate-hike spree by the US Fed, 1-year US Treasury yields have risen from 0.38% to 4.65% in 2022, making it a great time to invest in US debt. And within US Treasuries, the fund will invest in papers that mature up to 1 year.
 
Given the inversion in the US yield curve (long-term yields are lower than short-term yields, see chart), the 0-1-year segment offers the highest yields of 4.66% to 4.83%.
 
In comparison, 10-year US Treasuries are offering 3.51%. And once you calculate the returns in rupee terms considering the depreciation of the Indian currency, it adds another 4-5% to your dollar-denominated returns. For a long time, the rupee has depreciated against the dollar, though there have been phases when the Indian currency has appreciated. If we look at 1-year rolling returns, in nine out of 10 years since 2013, rupee depreciation has added to US dollar-denominated returns.