India’s first international ETF debt fund: Features, suitability, where it invests

There are three important things to know about the India’s first international ETF debt fund.

international, foreign, debt fund , features, where it invests,
The fund invests in of short-dated dollar denominated government bonds.

India’s first international ETF debt fund will soon be a reality for the Indian investors. IDFC mutual fund is launching ‘US Treasury Bond 0-1 year Fund of Fund’, an open ended FoF scheme investing in an overseas fund with US treasury securities in the 0-1 year maturity range. The NFO opens March 10, 2023 and closes on March 23, 2023.

Three important things to know about the fund is that – One, it will be investing in US Treasury Bonds with maturity up to 1 year and secondly, the funds are deployed in another overseas listed ETF and hence thirdly, it is a Fund of Fund (FoF). This also means investors’ money is not being exposed to US equities but will only be invested in short-dated US securities issued by the US government.

Name of the scheme has changed to Bandhan US Treasury Bond 0-1 Year Fund of Fund.

The funds invested by Indian investors in US Treasury Bond 0-1 year Fund of Fund are further invested in JPMorgan ETFs (Ireland) ICAV – BetaBuilders US Treasury Bond 0-1 year UCITS ETF. As of March 3, 2023, it had the AUM of USD 2.41 Billion and the Yield to maturity (USD) as of January 31, 2023 was 4,45%.

The US bond yield has been rising since the US Fed has started to raise rates. The rise in yields offer decent potential returns to investors as there is a lower differential between India and US yield. The 1-year US treasury yield has moved up from 0.72% to above 4% in the last one year. Consequently, spread between US and India has compressed from nearly 390bps to about 227bps making the US exposure relatively more attractive.

This is because of the depreciation in the INR vs USD that can positively impact the return to the Indian investor. Traditionally, the Indian Rupee has depreciated against the US dollar and in 9 out of 10 years, the depreciation in INR has added to USD returns. While an appreciation in INR vs USD may negatively impact return, the fund is expected to meet its objective of providing relative protection to the capital.

With concerns emerging on global economic growth, a rise in risk-off sentiment is being witnessed, favoring US bonds over other economies’ bonds and equities. The relatively safer asset US is an S&P AA+ rated country vs. India sovereign rated as BBB-.

Also Read: US CPI data for February – Know the time and release date in March

US Treasury Bonds with 0-1 year maturity comprise short-dated dollar denominated government bonds. As the exposure is to securities with a maturity between zero and one year, it translates to low duration risk for the investors. Therefore, the scheme suits those investors who wish to generate returns through investing in US treasury securities at the short end of the US Bond market.

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First published on: 09-03-2023 at 07:07 IST
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