Dollar Asset
Bandhan Mutual Fund, erstwhile IDFC Mutual Fund, has launched a new debt scheme with a twist. Called Bandhan US Treasury Bond 0-1 Year Fund-of-Fund (BUSTF), this scheme will give investors an exposure to overseas debt securities through the mutual fund route.
What is on offer?
BUSTF aims to provide long-term capital appreciation by passively investing in units or shares of overseas index funds and / or ETFs which track an index with US treasury securities in the 0-1-year maturity range as its constituents. For this purpose, the scheme will feed into the units of JPMorgan BetaBuilders US Treasury Bond 0-1 year UCITS ETF. The fund will be benchmarked against the ICE 0-1 Year US Treasury Securities Index.
What works?
Investors get exposure to US government bonds (treasuries), one of the safest investment avenues in the world. There is little credit risk and very low interest rate risk as the money gets redeployed at frequent intervals, compared to a medium- to long-term debt fund. Joydeep Sen, Corporate Trainer – Debt, says, “Since this scheme invests in bonds issued by a sovereign and offers low duration, it caters to the requirements of those investors who have low risk appetite.”
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Most Indians with financial goals involving dollar expenses, such as child’s education overseas, worry about the possible depreciation of the rupee against the greenback. “Investment in this scheme can be a way to take dollar exposure to pay for expenses overseas in the short to medium term,” Sen adds.
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For Indian investors, heavily invested in Indian stocks and bonds, an investment in this scheme can be a mode of diversification.
What does not work?
Interest rates in the US are low compared to India. For example, the underlying portfolio of the scheme offered a yield to maturity (YTM) of 4.59 percent as on 28 February 2023. In India, treasury bills (T-Bills) of tenors 91 days, 182 days and 364 days, issued by Reserve Bank of India (RBI) offer yields in the range of 6.75 percent and 7.25 percent.
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A point to note is that yields in the US have gone up significantly in the last one year. This has resulted in the narrowing of difference in yields of the two countries. However, this compressed difference may not last long.
Yet, even if one adds the possible 3 percent year-on-year (YoY) depreciation in the rupee, there is not much incentive to invest in BUSTF.
Amol Joshi, Founder of Mumbai-based PlanRupee Investment Services, says, “As the yields on the Indian high-quality bonds and government securities quote higher than the yields on US treasuries, there is no point in creating a dollar asset by investing in a scheme that invests in US short-term treasuries. Current yields on Indian bonds should compensate the Indian investor with returns enough to take care of dollar returns on treasuries and the rupee depreciation against the greenback.”
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Also, an important point to note is that though in the long term, the greenback appreciates against the rupee, there are periods when the rupee has shown appreciation. Such a situation can pull down the returns offered by this scheme.
What should you do?
Sirshendu Basu, Head Products, Bandhan Mutual Fund, says, “This scheme can be used to create US dollar assets by individuals who have a financial goal, such as overseas vacation, purchase of asset overseas, or child’s education abroad. This is not a ‘yield’ strategy, but is an effective means to take US dollar exposure for any overseas expense.”
For long-term investors with a penchant for some risk, there are many equity-oriented mutual fund schemes that offer to invest overseas and create a corpus over a period of time.
Individuals looking for fixed-income like returns may be better off with Indian bonds and debt funds investing in Indian bonds. Yields on US bonds have been low compared to Indian bond yields, and that may act as a big dampener. This is especially true in case of very short-term yields.
To be sure, this is not the first scheme investing in debt securities listed overseas. Franklin India International Fund (FIIF) used to offer exposure to foreign fixed income. The scheme was closed in April 2010. “Not many people were keen to invest in relatively low-yielding US securities then,” said a wealth manager on condition of anonymity.
Though most individuals can steer clear of this offering, investors with expected dollar expenses can consider this offering. Generally, such investors tend to invest in schemes that invest in stocks listed overseas when a goal involving dollar expense is 10-12 years away with the hope that equities reward them adequately. When the financial goals near ― typically two to three years ahead of the goal ― the investor can consider gradually shifting such money accumulated to dollar-denominated bonds, which can be achieved through BUSTF.
Investors should keep track of the expenses of the scheme, since the expected return on this scheme would be lower than that of an Indian debt fund.
The NFO closes on 23 March 2023.