Twin advantage: US-focused debt funds shine on yield, currency tailwinds

Deliver average annual return of 12%

US-focused debt funds, most of which were launched by domestic fund houses about two years ago amid elevated US yields, have delivered a strong performance over the past year, benefiting from a dual tailwind of easing US yields and sharp depreciation in the rupee.

 

These schemes, which invest in US bonds or international funds with US Treasuries as the underlying, have outperformed funds investing in high-quality Indian debt securities. The average one-year return of US-specific debt funds currently stands at around 12 per cent, shows data from Value Research.

 

In comparison, domestic debt schemes focused on Indian government securities, or gilt funds, have delivered an average return of about 4.5 per cent over the same period.

 

Schemes with higher exposure to longer-duration papers, such as the Axis US Specific Treasury Dynamic Debt Passive FoF and the DSP US Specific Debt Passive FoF, have delivered the highest returns, with gains of up to 14.3 per cent.

 

Shantanu Godambe, fund manager at DSP Mutual Fund, attributed the strong performance to moderating US yields and rupee depreciation. “There are two reasons. First is the moderation in US yields. In calendar year 2025 (CY25), US 10-year yields fell by around 70-80 basis points (bps), leading to mark-to-market gains, especially in the longer-duration segment. In our scheme, longer-duration papers (7-10 years) account for around 80 per cent of the portfolio. The portfolio delivered 7.8 per cent return in USD terms in CY25. The rupee depreciated by about 5 per cent against the US dollar, which further added to returns,” he said.

 

Vishal Dhawan, founder and chief executive officer (CEO) of Plan Ahead Wealth Advisors, echoed similar views. “There were two drivers. First, interest rate cuts by the US Federal Reserve led to mark-to-market gains in US bonds, and second, the depreciation of the rupee against the US dollar provided an additional boost to returns,” he said.

 

Going ahead, performance will hinge on global factors, even as easing in US yields is expected to continue. “US debt yields remain elevated relative to historical levels. We believe there could be some further moderation, which may support returns. However, until the US-India trade deal concludes, uncertainty in the USD-INR may persist,” Godambe said.

 

While the launches were timed to benefit from the expected compression in US yields, they were also positioned as a hedge against rupee depreciation, targeting investors saving for overseas expenses such as foreign education or travel. Despite the strong returns, investor traction has been limited. The five schemes in the category manage only about ₹500 crore in assets, largely because most have remained closed to fresh inflows due to overseas investment limit constraints.