
Mutual funds investing in international Fund of Funds with direct exposure to US Treasury bonds have emerged as the top performers among debt funds in 2026. According to reports from Mint, these funds have gained 5.4% so far in 2026 and 14.4% over the one-year period on a CAGR basis, representing the best performance in the fixed income category. The funds have generated returns of about 11% on a CAGR basis since their inception, significantly outperforming the CRISIL 10-year Gilt Index which gained about 5.5% on a CAGR basis since launch.
The strong performance is attributed to sharp rupee depreciation and favorable US Treasury market conditions. As reported by Mint, Rohan Goyal, Investment Research Analyst at MIRA Money, explained that the Indian rupee depreciated over 10% against the US dollar in the last year and a half. "For Indian investors, every percentage point of rupee weakness adds directly to the rupee returns on dollar-denominated holdings," Goyal stated. Aditya Agrawal, Chief Investment Officer at Avisa Wealth Creators, noted that strong returns were driven by falling US Treasury yields and rupee weakness against the US dollar.
According to Mint data, the top performing funds include Bandhan US Treasury Bonds 0–1 year Specific Debt Passive FoF-Direct with 6.1% 6-month returns and 14% 1-year returns, ABSL US Treasury 1-3 years Bonds ETFs Passive FoF-Direct with 6.1% 6-month returns and 14.8% 1-year returns, and DSP US Specific Debt Passive FoF-Direct with 5.6% 6-month returns and 15.3% 1-year returns. Most of these funds were launched in 2023, with only a handful of funds currently available in the category.
Experts suggest these funds can serve as strategic additions to fixed income portfolios for investors with US dollar-denominated goals. As reported by Mint, Goyal noted that these funds make sense for investors with future US dollar denominated goals where rupee depreciation hurts spending simultaneously benefits holdings. Agrawal emphasized that these funds provide diversification through exposure to high-quality US sovereign debt and can complement domestic debt allocations as a satellite holding. Investors are advised to consider allocating 5%-10% of their fixed income portfolio to this category.
These funds face significant tax implications due to their structure and regulatory framework. According to Mint reports, under section 50AA of the IT Act, all capital gains regardless of holding period are deemed short-term and taxed at the investor's applicable slab rate. At the 30% IT slab rate, a pre-tax return of 9% will become 6% on a post-tax basis. Additionally, there is an industry-wide limit of $7 billion for investments by Indian mutual funds in overseas markets, with each individual AMC allowed to invest only a maximum of $1 billion in overseas markets.