Bandhan Mutual Funds US Treasury Bond FoF offers niche dollar play

Rich investors looking to bet on rising interest rates in the US could consider allocating money to the new fund offer (NFO) of Bandhan Mutual Fund‘s US Treasury Bond 0-1 Year Fund of Funds (FoF). Wealth managers said investors with limited risk appetite must avoid the product and stick to domestic debt funds where yields are higher with no currency risks.

IDFC Mutual Fund was renamed Bandhan MF after the lender acquired the asset manager.

The US Treasury Bond 0-1 year Fund of Fund is an open-ended FoF that will invest in units of JPMorgan BetaBuilders US Treasury Bond 0-1 year ETF.

The fund will be benchmarked against the ICE 0-1 Year US Treasury Securities Index. The NFO is currently open and closes on March 23. Investors can put in a minimum of Rs 1,000 and there is an exit load of 0.25% redemptions within one month of investment.

Financial planners believe this is a niche fund that can be used to bet on a dollar asset. The benefit of this product is that it invests in US treasuries – the safest instrument in the world. With the duration of the fund currently being 0.31 years, there is a low interest rate risk. With one-year bond yields in the US surging, investors can earn returns of 4.7%. “The fund can work well for someone who needs dollar exposure for near-term goals like children’s education or a vacation,” said Juzer Gabajiwala, director at Ventura Securities.

Investors must remember that returns could cool off once interest rates come down. Also, this fund carries currency risk. Rupee depreciation could work in its favour while appreciation could eat into returns.

“The fund has a limited appeal. Investors eyeing fixed income can make better returns with ultra short-term or arbitrage funds,” said Deepak Chhabria, CEO of Axiom Financial Services.Currently, ultra short-term funds could yield 6-6.5%, and arbitrage funds 5.5-6% with equity taxation. Overseas funds are taxed like domestic debt funds.