IDFC Mutual Fund (MF) is set to launch India's first international debt fund, the IDFC US Treasury Bond 0-1 Year FOF (fund of funds). With this international debt fund, Indian retail investors can now have access to diversify their investments and invest in ultra-safe, currently high-yield US treasury securities. They can also use this FOF as a hedge against their exposure to the US dollar (USD).
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February 17, 2023
Stay Tuned to know more! pic.twitter.com/pQbA7Z45vMThe IDFC US Treasury Bond 0-1 Year FOF will invest in JPMorgan BetaBuilders US Treasury Bond 0-1 Year UCITS ETF, an exchange-traded fund (ETF) with exposure to 0-1-year US treasuries. Except for some cash holdings for liquidity needs, the fund will have 100% exposure to US treasuries.
Low-Risk, High-Quality Investment
In 2022, the 1-year US treasury yields have increased from 0.38% to 4.65%, making it a good time to invest in US debt instruments.
And, while US treasuries trade at lower yields compared to the Government of India debt papers, having exposure to US debt is now relatively more attractive, with the gap between the two narrowing down. Since January 2022, this yield gap between the two has narrowed from around 400 basis points to 227 basis points.
Since the IDFC US Treasury Bond 0-1 Year FOF will invest in US treasuries that will mature in up to one year's time, it will be low-risk from an interest rate risk perspective. This international debt fund by IDFC MF has a modified duration of 0.30. This means that for every 1% rise in interest rates, the fund's net asset value (NAV) will fall by only 0.30%, and vice versa.
Hedge Against USD Exposure
The IDFC US Treasury Bond 0-1 Year FOF will give Indians an easy way to hedge their exposure to the US dollar. Today, one can hedge their investments from the risk of US dollar appreciation by entering into futures contracts on the National Stock Exchange (NSE). While one may choose to enter into 1-month futures contracts as they are most liquid, they will need to keep rolling it over to the next month. Moreover, any income from F&O trading is considered a business income and is taxed accordingly.
Various online platforms also provide the facility to invest in international ETFs tracking US treasuries. This investment will come under the RBI's Liberalized Remittance Scheme (LRS). Following the proposals of Budget 2023, from July 1, 2023, such transactions will attract a 20% tax collected at source (TCS), which is higher than the earlier 5%. Also, these foreign investments will need to be disclosed in the income tax returns even if one falls under the tax-exempt category, adding to their tax compliance burden.
The IDFC US Treasury Bond 0-1 Year FOF offers a hassle-free way to invest in Indian rupees and earn US dollar-denominated returns, or easily hedge your USD exposure. Talking about the FOF, Vishal Kapoor, chief executive, IDFC AMC said “Investing in global markets offers a holistic portfolio diversification, and the IDFC US Treasury Bond 0-1 Year FOF offers low-risk international diversification with high quality and low volatility. The fund can help create a USD asset for funding a near-term or defined expense without taking equity market-linked volatility."
The capital gains from the IDFC US Treasury Bond 0-1 Year FOF will be taxed at 20% with an indexation benefit if the holding period is 3 years or more. The FOF has an indicative expense ratio of 0.12% for direct plans and 0.19% for regular plans. For investments redeemed within a month of the date of allotment, the FOF will have an exit load of 0.25%.
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