Domestic mutual funds roll out global debt funds amid rising yields

With US Treasury yields hitting multi-decade highs, domestic mutual funds (MFs) are rolling out international debt funds.

After Bandhan MF's US Treasury Bond 0-1 year Fund of Fund (FoF), Aditya Birla Sun Life (ABSL) MF has come out with US Treasury 1-3 Year Bond ETFs FoF and 3-10 Year Bond ETFs FoF.

US bonds, which generally offer low yields, have turned attractive post the 525-basis point hike in US interest rates. According to Bloomberg data, the 1-year and 2-year US treasury yields now stand at 5.4 per cent and 5.1 per cent, respectively.

Although the yields remain lower than what Indian government bonds offer, the differential has come down steeply. From around 500 basis points (bps) in early 2022, the gap between 10-year Indian and US government bond yields has shrunk to around 280 bps.

These higher yields make them the right fit for certain use cases. Investment advisors say the product can be looked at when saving for overseas goals.

"They could be looked at for short-term goals like international travel as well as medium-term goals like foreign education. They also make sense from a diversification point of view," said Vishal Dhawan, founder of Plan Ahead Wealth Advisors.

More than the yields, the advantage of investing in US debt lies on the currency front. For international goals, they shield the portfolio from rupee depreciation. Those investing otherwise will get added returns if rupee depreciates during the investment period.

"Investors must keep the currency movement in mind as it may impact the overall returns. On a long-term basis, the rupee tends to depreciate against the dollar. In the last 15 years, it has depreciated at around 5 per cent per annum. These funds are a good choice for diversification of your portfolio and you could take advantage of an interest rate reversal and currency depreciation play on a long-term basis. However, it may remain volatile in the short term," said Mukesh Kochar, National Head - Wealth, AUM Capital.

The three offerings in the category differ from the risk-reward point of view. While the shorter-duration schemes (0-1 year and 1-3 year) are less susceptible to interest rate fluctuations, the longer-horizon fund (3-10 year) allows investors to lock-in the elevated yields for an extended duration and also has a higher potential for capital appreciation during the rate cut phase.

"The benefits (in case of 1-3 year fund) include higher absolute yield, lower volatility and duration risk and an opportunity to earn capital gains. (For the 2-10 year fund) The benefits include locking in higher yield for long-term, adding duration to portfolio and an opportunity to earn capital gains," ABSL MF said in a press release.

The Bandhan US Treasury Bond 0-1 year FoF, which was launched in March 2023, has delivered 3.87 per cent return in the six-month period, according to Value Research data.