Bandhan US Treasury Bond 0-1 year Fund of Fund has generated a lot of buzz in the mutual fund circle. What prompted Bandhan MF to launch this product?
Over the last few years, we have been seeing an increased understanding and appetite among Indian investors for global diversification. However, the mutual fund route for achieving this diversification has largely been limited to international equities as an asset class, which comes with its own volatility. Diversifying opportunities into International debt-oriented assets have been missing. Therefore, for an investor wanting to invest in a safer international asset, the nearest available option was remitting funds under the Liberalized Remittance Scheme (LRS), which can be considerably more complicated and limited. The need to bridge this gap led us to design a product that could offer a high-quality portfolio with low duration risk, which may be attractive for investors who have the need for a USD asset to meet a future USD expense. We are happy that we were able to structure the Bandhan US Treasury Bond 0-1 Year Fund of Fund which can help meet this need.
With this fund, an investment by an Indian investor will be made in INR locally into the Bandhan US Treasury Bond 0-1 Year Fund of Fund. Our fund will in turn invest into an overseas ETF that invests in US Treasury Bonds. Being a local investment, individual remittance limits and Tax Collected at Source (TCS) requirements under the LRS facility are not applicable.
Why US debt – that is the question most investors would ask. Why should a regular investor choose the US debt when he can earn more in Indian debt?
The US is the world’s largest economy with a nominal GDP of around US$ 25 trillion. The US Dollar is regarded as the world’s dominant reserve currency and is the mainstay in most global portfolios as it can be used widely to settle international trade transactions. Currently, central banks hold around 60% of their foreign exchange reserves in dollars. During turbulent market conditions, investors tend to flee from risky assets and favour US bonds as these assets are considered relatively less risky. Given the above, we believe exposure to USD debt can be very attractive in an investor’s aim to diversify globally. However, a risk-averse investor looking at INR returns, with no requirement of geographical diversification and with no underlying need to create a USD asset may continue to choose Indian fixed-income funds offering high quality and low volatility.
Interest rates are ruling high because the US Fed has been aggressively hiking rates to tame inflation. And Interest rates are likely to remain high for some time in the US. What is your assessment?
Our fund is a passively managed fund with an underlying investment in 0 to 1-year US treasuries. It is agnostic to views on interest rates or currency movement, as the main aim of the product is to provide investors with an opportunity to build a USD debt asset that can match their future USD liability or expense, therefore reducing the risk of an adverse USD/INR currency movement. Further, since the fund’s duration is just 0.3 years, any change in interest rate will be captured quickly.
The rates may come off highs next year if inflation eases. What will happen to the scheme once the US rates become normal?
The 2009-2021 was a period that saw an exceptional response by the US Fed – first due to the Global Financial Crisis in 2008, and then the Covid crisis in 2020. Barring this period, rates have generally been at higher levels through longer periods of US history. While many market participants believe that interest rates could be higher for a longer period this time, our product does not take any view on interest rates. It has a simple proposition of offering an investment that represents the highest quality US Debt with low duration and is passively managed. Considering the average maturity and duration of the underlying is around 0.3 years, any potential increase or decrease in interest rates is expected to have minimal impact on the returns of the underlying Fund. Naturally, a lower interest rate regime will mean the fund accrues interest at a lower rate.
Who should invest in these schemes, and what are the risks they should be careful about?
This offering will be attractive for investors seeking to create a safe, high-quality USD asset for funding near-term or defined expenses, without exposing the portfolio to equity market-linked volatility or high-duration risk.One needs to be aware of the impact of the rupee movement versus the US Dollar on overall portfolio returns in INR terms. While in our study, in 9 out of the last 10 calendar years, the Rupee has depreciated against the US Dollar, any possible strengthening/ appreciation of the INR can negatively impact total returns from the Fund of Fund.
