IDFC US Treasury 0-1 FOF NFO – How does this work? Who should consider investing?

Investment in stock markets is seeing renewed interest in recent years and the current rally of the Nifty and the Senex is a testament to that. There has also been an increased interest in investment in international stocks and funds, especially US stocks. IDFC Mutual Funds are now bringing a unique opportunity to invest in US Treasury Securities enabling Indian citizens to get access to one of the top safe haven investments in the world. Given here are the details of this fund and whether it will make a good addition to your portfolio.  

Read More: SEBI allows investments in international funds again – All you need to know 

What Is IDFC US Treasury 0-1 FOF NFO?

IDFC US Treasury 0-1 FOF is being launched by the IDFC Mutual Funds after the approval received from the SEBI in this regard. This fund will be launched on 10th March 2023 and will close on 23rd March 2023. This fund will be the first international ETF in India that will invest in US Treasury Bonds in the short-term duration category.

The bond yields in the US Treasury Bonds have significantly increased over the past years from 0.43% to 4.73% in one year. This increase has come against the backdrop of the tightening of the monetary policy of the US post-Covid and due to the rising inflation in the country.

The current interest offered on the 10-year Government Security in India is approximately 7.46% and the gap between the US Treasury security and the Indian G-Sec is narrower than ever. This has presented an exciting investment opportunity for local investors. IDFC US Treasury 0-1 FOF aims to tap into this opportunity by providing Indian investors an opportunity to invest in one of the safest investment options available globally and gain attractive returns along the way. 

The highlights of this fund are tabled below. 

Category	Details
Fund name	IDFC US Treasury 0-1 FOF
Benchmark	ICE 0-1 Year US TreasurySecurities Index
Fund managers	Mr. Sreejith Balasubramanian (Overseas portion)Mr. Brijesh Shah (Debt portion)
Investment horizon	Short term fund (0-1 year maturity)
Composition	Majority in JPMorgan (NYSE:JPM) BetaBuilders US Treasury Bond 0-1 year UCITS ETF and cash
Minimum application amount	Rs. 1,000/- and inmultiples of Re.1/- thereafter
Approximate Expense Ratio	0.12% for the direct plan0.19% for the regular plan
Exit load	When the units are redeemed/switched out within 1 month from the date of allotment – 0.25% of applicable NAVWhen the units are redeemed/switched out after 1 month from the date of allotment – NIL

What are the advantages of investing in this fund?

After reviewing the above highlights, let us consider the benefits of investing in this fund. Some of the key benefits are mentioned hereunder. 

1. Attractive returns

Investing in IDFC US Treasury 0-1 FOF is focused on investing in US Treasury Bonds. The interest rates on these bonds have significantly increased over the past years. The fund will invest in the 0-1 year investment horizon of the US Treasury Bonds that give among the highest yields of approximately 4.66% to 5.2%. This makes it an ideal investment opportunity for investors seeking to tap into the benefits of the current high yield of the US treasury. 

2. Low-risk investment

The US Government debt is rated as a high-quality asset with the rating of AA+ from S&P while India has a BBB- rating. This makes US Treasury Bonds a highly safe investment option in the current volatile markets and concerns rising on global economic growth. An opportunity to invest in these bonds therefore is highly attractive to the average Indian investor where even institutional investors are favouring US bonds over investment opportunities in other countries. 

3. Depreciating rupee

In the past year, the INR has depreciated significantly due to multiple pressures like the rising crude oil prices, the ongoing war between Russia and Ukraine, disruption of global supply chains and the reeling impact of the pandemic. The current global economic pressures may result in further depreciation of the rupee. Investing in a US Treasury at such times can prove to be beneficial for Indian investors and can provide them with higher returns. Therefore, investors looking to gain dual exposure from investing in the US treasury and benefiting from the USD – INR currency movement can invest in this fund.

4. Liquidity

These funds are considered to be highly liquid being in the nature of an ETF and investing heavily in US Treasury Bonds. Therefore, investors can make a timely exit from the fund subject to the exit load.

5. Short-term tenure

The fund’s investment horizon is 0-1 year, which corresponds with lower duration risk. This fund can be an ideal investment opportunity for investors looking to build high-quality US assets in a short duration and also use it as a short-term hedge against their dollar exposure. 

What are the disadvantages of investing in this fund?

This fund has multiple benefits for Indian investors however, there are a few limitations as well that investors need to consider before investing in it. These limitations are highlighted below. 

1. Other investment opportunities

This fund is banking on the high-interest rates on US Treasury Bonds in the 0-1 year tenure. However, with the reduced market uncertainty on a comparable basis and the slowing inflation growth, investors can invest their funds in other investments that may provide better returns and at the same time belong to the low-risk category of investments.

2. Taxation

IDFC US Treasury 0-1 FOF belongs to the debt fund category as per the SEBI guidelines on mutual fund classification. Therefore, the gains from the fund will be treated as short-term capital gains and will be taxed at the applicable slab rates of the investors. This can significantly reduce the net gains from investing in these funds, especially for investors belonging to higher tax brackets.  

3. Cap on international allocation set by SEBI

Furthermore, as per the SEBI guidelines on international allocation permissible for ETFs and FOFs, there is a cap of US$ 300 million on all the ETFs investing in the international markets. This can reduce the potential returns that can be made by investors. 

Conclusion

IDFC US Treasury 0-1 FOF is an attractive investment opportunity for Indian investors who seek to invest in international markets but not in foreign stocks. This fund provides an opportunity to build a fixed-income asset in the dominant currency and also use it as a hedge for dollar exposure and meeting US expenses like an investment for education corpus. It is important for investors to understand their individual risk tolerance and the objective of the fund before investing in the same in order to align it with their financial goals.

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