Thread by @ETMONEY

The 1-year US Treasury paper returns are nearly 5% (see image).

Add 3%-4% rupee depreciation (against the dollar) to this.
Investors could make an 8%-9% return

To let investors make use of this opportunity, @bandhanmutual has launched a new fund

Is it worth investing in?

A🧵

Bandhan MF (erstwhile known as IDFC MF) has launched a new scheme.

The new fund - Bandhan US Treasury Bond 0-1 year Fund of Fund - is now open for subscription & will close on March 23.

Here’s how the fund works 👇

When you buy units of this fund, the fund house takes your money (in rupees) and invests it in overseas funds (after converting it to dollars).

The overseas #funds, in turn, invest in one-year US Treasury bonds.

Where will Bandhan Mutual Fund invest your money? 👇

The new fund will invest in 2 schemes. (Details are in the table)

But the scheme document also states the underlying schemes can change.

The only constant: The underlying schemes will invest in US Treasuries maturing in 1 year

Your investments in the Bandhan fund can grow due to 2 reasons:

Yields of the US Treasury bonds
Depreciation of the rupee against the US dollar

While a depreciating rupee will boost your #returns, a strong rupee can eat into them.

Let’s check some data to understand the currency risk better.

According to the Bandhan MF presentation, one-year US Treasuries never gave negative returns in #dollar terms in the past decade.

But in rupee terms, there were negative returns in 2017.

Now, let’s discuss if you should invest in this fund.

Given the fund’s mandate, ideally, it should help you achieve your short-term goals.

But, it may not necessarily be the best fit for that.

Why? A weak dollar (or a strong rupee) can lead to negative returns.

There’s another reason to be mindful of the US Treasury bonds.

Currently, the US Treasury yields are around 5%.

But usually, the yield on short-term US government bonds is much lower (See table).

The higher yields on the short-term US govt bonds is an aberration.

Typically, they have had less than 1.5% yields in the past decade.

So, if you add 4%-5% rupee depreciation, the best returns you can expect is 5.5% to 6.5%.

This is before the expense ratio and tracking error.

The returns – 5.5% - 6.5% – may sound attractive.

But, as pointed out, they would depend on rupee depreciation.

It means the returns would fluctuate quite a lot.

But investors typically prefer less volatility and more stability for their short-term investments.

So, overall, this fund cannot replace FDs or short-term domestic debt funds.

However, there are some specific cases for which you can consider this fund.

Let’s look at them. 👇

The high yields of the short-term US treasuries and the depreciating rupee may lure some investors.

So, they may want to take tactical exposure.

They must understand the currency risk before #investing and how it can impact returns.

You may also opt for this fund if you want to save for a short-term goal in the #US.

This will be a safe #investment and a hedge against the rupee losing its value.

So, even if the rupee depreciates, you can meet your goal comfortably.

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