IIDFC Mutual Fund (MF)—a fund house known for its debt funds—is all set to launch the IDFC US Treasury Bond 0-1 Year FOF (fund of funds), the industry’s first international debt fund. This opens the doors for Indian retail investors to gain access to the ultra-safe and currently high-yield US treasury securities, and also hedge their exposure to the dollar in a convenient way. It gives investors an opportunity to diversify beyond India, and into US treasurys which are seen as a safe-haven asset in times of economic uncertainty. The FOF will be investing in JPMorgan BetaBuilders US Treasury Bond 0-1 year UCITS ETF, an exchange traded fund with exposure to 0-1-year US treasurys. The FOF will have 100% exposure to US treasury except for some cash holdings for liquidity needs. TRENDING STORIES See All Premium US labor market resilient; inflation hotter in fourth q . . . Premium Zombie horror Premium ‘Inflation may cool, but risks remain’ Premium Data recap: Bids for lithium, house prices High quality, low credit risk With the US Fed on a rate-hike spree, 1-year US treasury yields have climbed up from 0. 38% to 4. 65% in 2022 , making it a good time to invest in US debt. And within US treasurys, the fund will be investing in papers that mature in up to 1 year. Given the inversion in the US yield curve (long-term yields are lower than short-term yields, see chart), the 0-1-year segment offers the highest yields of 4. 66% to 4. 83%. Compared to this, 10-year US treasurys are offering 3. 51%. And once you account for returns in rupee terms assuming the Indian currency depreciates, that adds another 4-5% to your dollar-denominated returns. Over the long run, the rupee has depreciated against the dollar, though there have been phases when the Indian currency has appreciated. If we look at 1-year rolling returns, in nine of the 10 years since 2013, the rupee depreciation has added to the US dollar-denominated returns (see chart). Also, while US treasurys trade at lower yields than the government of India debt paper, with the gap between the two narrowing, having exposure to US debt has become relatively more attractive today. This yield gap has narrowed from around 400 basis points (bps) to 227 bps since January 2022. The US sovereign debt, a very high-quality asset, enjoys AA+ rating compared to India’s BBB- rating from rating agency Standard & Poor’s View Full Image IDFC US Treasury Bond 0-1 Year FOF (fund of funds) Share Via That the fund will invest in US Treasurys maturing in up to one year’s time makes it low-risk from an interest rate risk perspective. The fund has a modified duration of only 0. 30. This implies that for every 1% change (rise) in interest rates, the fund NAV or net asset value will be impacted (fall) by only 0. 30%, and vice versa. Hedge against dollar exposure MORE FROM THIS SECTION See All Premium Premium New era of customer centricity awaits as IRDAI lays the . . . Premium Premium Everything you need to know about stock splits Premium Premium Things to keep in mind while adding a critical illness plan Premium Premium Why do women need investment and financial freedom? Importantly, what the fund will do is give Indians a hassle-free way to hedge their exposure to the dollar. Today, you can hedge yourself from the risk of dollar appreciation by entering into futures contracts on the NSE. You can enter into 1-month contracts (which are the most liquid) for this but that requires you to keep rolling it over to the next month. Also, any income from futures and options trading is considered as business income and taxed as such. You can also invest in international ETFs tracking US Treasurys through online platforms. This investment will fall under the RBI’s Liberalized Remittance Scheme (LRS) which permits Indians to freely remit up to $250,000 per financial year for any permissible foreign currency transaction. Following the budget 2023 proposal, all such transactions will attract 20% tax collected at source, or TCS, (up from the earlier 5%) from 1 July. That means, you will have to set aside an extra 20%, which will be withheld by the tax authorities, for the same investment as before. Also, such foreign investments have to be disclosed in your income tax returns even if you fall under the tax-exempt category, adding to your compliance burden. The IDFC FOF provides you a convenient way to invest in rupees and earn dollar-denominated returns, or conveniently hedge your dollar exposure. “Investing in global markets offers a holistic portfolio diversification, and the IDFC US Treasury Bond 0-1 Year FOF offers low-risk international diversification with high quality and low volatility. The fund can help create a USD asset for funding a near-term or defined expense without taking equity market-linked volatility," says Vishal Kapoor, chief executive, IDFC AMC. Your returns (capital gains) from the IDFC FOF get taxed at 20% with indexation benefit if your holding period is three years or longer. The IDFC FOF has an indicative expense ratio (will be known precisely later) of 0. 12% and 0. 19% for direct and regular plans, respectively. The fund will have an exit load of 0. 25% for investments redeemed within a month of the date of allotment. Catch all the Business News , Market News , Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates. More Less OPEN IN APP.