The fund will invest in JPMorgan BetaBuilders US Treasury Bond 0-1 Year UCITS ETF. This underlying fund will give locals access to short-term US treasury securities, globally considered a safe haven asset. It will let investors take a view on US interest rates while also offering another route to play the rupee-dollar trade. Currently, US bond yields are elevated compared to previous decades, presenting a lucrative opportunity. The 1-year US bond yield trades at around 5%.
The rate differential with India government bonds has come off dramatically over the past year. The 1-year India government bond currently yields a little over 7%. Presuming 3-4% yearly depreciation of the rupee against the dollar, actual returns may add up to more than 8% over the medium term horizon. Currency depreciation can effectively compensate for the lower yield on US bonds relative to Indian bonds. Even generally, this fund offers a cleaner path to placing a bet on the dollar. Investors can invest via feeder funds investing overseas, but this exposes you to the gyrations of the stock market. Investing abroad directly via the LRS route will soon involve hefty initial costs with all overseas remittances set to face 20% tax collected at source from July this year. Comparatively, this route involves lesser volatility. This works well for those who want to build low-risk dollar assets.
Further, the fund comes at a much lower cost. The expense ratio for the fund (including for underlying ETF) is 0.19% for the regular plan and 0.12% for the direct plan. Capital gains from the fund will be taxed at 20% after indexation, if held for more than three years. If redeemed earlier, gains will be added to income and taxed at the slab rate. While US government bonds are a safe avenue, investors must not ignore interest rate risks. This risk is prominent in US treasuries also. In fact, the launch of this new fund comes in the wake of what has been the worst year on record for US bonds. In 2022, US bonds suffered their worst drawdown as the US Federal Reserve hiked rates at the fastest pace in its history. The long term US treasury bonds sank nearly 30% last year. The US Total Bond Index lost more than 13% in 2022. While the chances of US treasury bonds meeting the same fate going forward are slim, it is prudent to understand the risks.
To be sure, this is not the first such offering in domestic markets. Franklin Templeton India had started a fund investing in US government mortgage-backed securities back in 2003. The scheme was shut down in 2010 after seeing poor returns.
