First International ETF Debt Fund Launching in India- Should You Invest? (2024)

The first global debt fund in India, the IDFC US Treasury Bond 0-1 Year FOF (fund of funds), will be introduced by IDFC Mutual Fund.

Overview of the Fund:

• Investment Horizon: Short Term (0-1 year)
• Composition: Investing in JPMorgan (NYSE:) BetaBuilders US Treasury Bond 0-1 year UCITS ETF. With the exception of some cash for liquidity purposes, it is entirely exposed to the US Treasurys.
• Indicative Expense Ratio: 0.12% for the direct plan, 0.19% for the regular plan
• Exit load: 0.25% if redeemed within a month of the date of allotment
• Modified Duration: 0.3 (With every 1% rise in interest rates, the fund’s NAV falls by 0.30%, and vice versa)

2. Depreciation of the Rupee: The Indian Rupee depreciated by around 10% against the and the rupee was the worst-performing Asian currency in 2022. Given the rising interest rate across global economies, recession fears, and political uncertainties, the rupee might be under some pressure in 2023 as well. Investing in dollar terms while the rupee is depreciating can add to the rupee-denominated returns.

3. Low Risk and High Credit Quality: The US government debt is a very high-quality asset having an AA+ rating from the rating agency Standard & Poors compared to India’s BBB- rating. Since 2022, the yield gap between Indian and US treasuries has decreased from over 400 bps to 227 bps. Despite the fact that the US treasury trades at lower rates than India’s treasury, the low-risk trade with decreasing interest gap seems like an attractive option.

4. Diversification: Indian Retail Investors can diversify their portfolios by purchasing high-yield, ultra-safe US Treasury securities.

5. Changes in Liberalized Remittance Scheme (LRS): An alternate option is to invest in International ETFs tracking US Treasurys through online platforms. The Liberalized Remittance Scheme of the RBI applies to this investment. According to the budget 2023 proposal, starting on July 1st, all such transactions will be subject to 20% tax collected at source (up from the prior 5%). That means that in order to make the same investment as before, you will need to set aside an additional 20%, which the tax authorities will deduct. Indian mutual funds and ETFs are not subjected to LRS and hence provide a more financially sound way to invest in international debt.

Cons of Investing:

1. Taxation: Short-term capital gains (sold in less than three years) in debt mutual funds are taxed according to the investor’s appropriate tax rate since it is a debt fund. If debt mutual funds are sold off after being held for more than 36 months, the long-term capital gain is subject to indexation benefits at a 20% tax rate. As a result, investing in an asset with a short time horizon requires caution.

2. Investment Timing: As the yield curve is inverted i.e. short-term yields are higher than long-term yields, an investment opportunity with a 0-1 year horizon in treasury seems attractive. This might not be the case 3 years down the line. Hence, investors need to be vigilant of changes in macroeconomic indicators while investing in this instrument.

Conclusion:

IDFC’s International Debt Mutual Fund allows investors the chance to diversify outside of India and into US treasuries, which are seen as a refuge asset during uncertain economic times as is being witnessed by the world today. The fund makes it possible for Indian retail investors to hedge their exposure to the dollar while simultaneously gaining access to the extremely safe and high-yield US Treasury securities in a more financially sound way. Before investing in any fund, investors should have a clear understanding of their financial goals and risk tolerance to make informed investment decisions that align with their objectives.

Disclaimer: Above piece is only for information purposes. Please consult a SEBI Registered Investment advisor before taking any investment decision.