Smartmoney

Mutual funds can now invest up to 4 per cent of their assets in overseas debt instruments—through an existing or new scheme. The upside. In the past year an Indian investing in highest safety foreign debt would have got 9-10 per cent. That’s attractive considering returns from domestic debt are expected to be 7-10 per cent over the next year or so. The higher return is because, in addition to interest and capital appreciation, a third income stream comes into play—currency gains. This is what fund managers are eyeing. Government paper yields in developed markets are around 2 percentage points lower than in India. However, the expected depreciation in the rupee should more than bridge this differential (See table). Here are two tips to maximise the returns potential that foreign debt offers.