Can you invest in Foreign Govt. Bonds?
You can but you’ll have to do it through an international broker that offers access to foreign govt. bonds. You could do it through a Foreign debt fund/ETF *(assuming US/EU or developed markets’ debt) *is generally not lucrative enough for Indian investors due to the following reasons:
- Low interest rates (At the moment, US 10Y is at 1.5% whereas Indian 10Y is at 6.3%).
- Currency risk (Since they’re denominated in foreign currency, net gains will be determined by the currency rates at the time of squaring off the investment). If INR appreciates, then your gains can be easily wiped out. You can hedge your risk by buying shorting the dollar using F&O for instance. In reality, hedging costs money and it’ll eat into your potential annual yield of 1.5%.
- RBI’s Liberalized Remittance Scheme (LRS), has an upper limit of $250,000 per individual investor. This is not favourable for HNIs. The interest you can receive from US bonds is minuscule with this amount.
If you’re looking for safety, then the better alternative is to invest in Sovereign Gold Bonds (SGBs). You can earn 2.5% per year and enjoy the other benefits such as:
- Capital appreciation is linked to gold.
- Accepted as collateral for loans with a minimal haircut.
- No credit risk as it is backed by gold and issued by the RBI.
- Capital gains are tax-free if held till maturity.
- No TDS on interest income.
It’s also hassle-free. The only downside is that it has a lock-in of about 5 years and have a maturity period of 8 years.