Skidding $ Scuttles Funds Foreign Debt Plans

The appreciation of the rupee against the dollar and falling US Treasury yields have put mutual funds (MFs) ning to invest in overseas debt in a spot of bother.

Over the last one month, the dollar has depreciated around 0.45 per cent against the rupee. In fact, the greenback is losing ground against all major global currencies.

One of the main advantages that the funds had been hoping for in terms of investing in the US markets was the arbitrage opportunities available in the rupee-dollar exchange rate. The appreciation of the rupee against the dollar has put paid to these hopes.

Sun F&C Mutual Fund had raised Rs 7 crore to invest in overseas debt instruments but is yet to utilise it. "We are waiting for the dollar to appreciate before we invest there," a source said. Industry sources pointed out that the accounting scandals in the US had led to a weakness in the equity markets there which in turn has led to the money being diverted to the bond market, resulting in rising prices and low yields.

Kotak Mahindra Mutual Fund is planning to launch a $14 million overseas fund which will invest in overseas debt instruments.

"But investing right now would not be advisable," said Sandesh Kirkire, fund manager in charge of debt schemes at the fund house.

While there are other options such as the UK where investments can be made, industry sources said that the bond markets there are not really attractive in terms of the returns expected. "The US debt markets are the most liquid and a variety of instruments are available," said Milind Nandurkar, fund manager at Sun F&C.

The facility of investing in overseas debt, announced in this year's Budget, was received with much fanfare but has not really taken off due to a number of factors.

The $500 million investment cap for the whole sector is seen too restrictive and the funds also want to invest in lower rated papers to get better returns.