What are treasury bills and how do they work?

Treasury bills, or T-bills, are short-term debt securities issued by the Reserve Bank of India (RBI) on behalf of the Government of India. They help the government meet its immediate financial requirements. Essentially, they serve as a government commitment to repay a specified amount on a future date. T-bills are issued at a discount to their face value, and the difference between the purchase price and the face value represents the potential return for investors. This articled helps investors understand the workings of T-bills and how they can diversify their investments with options that carry relatively lower risk.

• Table of contents

• What are treasury bills?
• Why the government issues treasury bills
• Types of treasury bills
• How do T-Bills generate gains?
• Features of treasury bills
• Benefits of treasury bills
• Limitations of treasury bills
• Who should consider investing in treasury bills?

What are treasury bills?

Treasury Bills, often called T-Bills, are short-term debt securities issued by the Government of India to raise funds. These securities are short-term instruments, with maturities of up to a year. They are also known as “zero coupon bonds” as they pay no rate of interest.

This article gives you a comprehensive guide on treasury bills.

Why the government issues treasury bills

The government issues treasury bills to raise short-term funds to finance various expenditures, such as budget deficits and government projects. T-Bills can help governments manage their cash flow needs efficiently. By issuing treasury bills, governments can also control the supply of money in the economy and influence interest rates.

Types of treasury bills

Treasury bills are commonly classified based on their maturity periods and include

• 91-day treasury bill
• 182-day treasury bill
• 364-day treasury bill

How do T-Bills generate gains?

T-Bills do not offer a rate of interest but are issued by the government at a discount on the face value. For example, a treasury bill with a face value of Rs. 100 may be issued at Rs. 97 (a discount of Rs. 3). However, the investors can sell the bill at its face value (Rs. 100) on maturity and realise a gain of Rs. 3.

Also Read: What are the opportunities and risks of investing in emerging markets?

Features of treasury bills

• Stability: Treasury bills are considered a stable investment because they are issued by the government and therefore carry minimal credit risk. This makes them a good fit for investors seeking capital preservation.
• Liquidity: Treasury bills are highly liquid investments , which means they can be easily bought and sold in the secondary market. This liquidity gives investors the flexibility to access their funds quickly if needed.
• Fixed income: While Treasury Bills do not pay periodic interest like traditional bonds, investors earn a return through the difference between the purchase price and the face value at maturity. This makes T-Bills a source of potentially predictable income for investors.

Benefits of treasury bills

• Stability of principal: Treasury bills are issued by the government and are hence one of the most stable investments available. Investors can rely on the government's ability to honour its debt obligations, ensuring stability of capital invested in Treasury Bills.
• Stable returns: Treasury bills provide investors with a predictable return potential based on the difference between the purchase price and the face value at maturity. This makes T-Bills an attractive option for investors seeking stability.
• Diversification: Treasury bills can add an element of diversification to an investment portfolio. By including T-Bills, investors can mitigate the overall portfolio risk and enhance stability, especially during periods of treasury bills?
• Liquidity and flexibility: The high liquidity of treasury bills allows investors to trade them in the secondary market. This liquidity provides investors with the flexibility to adjust their investment holdings quickly in response to changing market conditions or liquidity needs.

Limitations of treasury bills

Although treasury bills are a relatively lower risk investment option, they have certain drawbacks. One key limitation is their relatively lower potential returns compared to investment avenues such as equities or equity mutual funds. As short-term instruments, they may not align with long-term financial objectives.

Another drawback is the impact of inflation. If inflation surpasses the returns offered by T-bills, the real value of the investment can decline. Additionally, their yields are influenced by market interest rate fluctuations, which can affect overall potential returns.

Who should consider investing in treasury bills?

Treasury bills can be suitable for individuals and institutions looking to deploy surplus funds for a short period with relatively lower risk. They may be suitable for those who prioritize relative stability of capital over the potential for higher returns. Individuals needing short-term investment options—whether for an upcoming expense or to hold funds temporarily before investing elsewhere—may also find T-bills suitable.

Moreover, banks, financial institutions, and corporate treasuries frequently use T-bills to manage short-term liquidity. They may also be suitable for investors looking to diversify with assets that have a relatively low correlation to equity markets. However, while they carry relatively lower risk, they are not entirely without risk, and their returns are typically lower than those of equity or longer-term debt instruments.

Also Read: Flexi cap funds: Exploring growth potential in emerging markets

Conclusion:

Considered to be relatively stable and reliable, T-Bills can be a suitable avenue for short-term investments or can be added to a portfolio for stability and diversity.

FAQs

What are treasury bills (T-Bills)?

Treasury Bills (T-Bills) are short-term debt instruments issued by the Reserve Bank of India (RBI) on behalf of the Indian government. They serve as a commitment from the government to repay a specified amount on a future date and are considered relatively low-risk investments.

How do Treasury Bills work?

T-Bills are issued at a discount to their face value and redeemed at full value upon maturity. Investors do not receive periodic interest payments; instead, their potential return is derived from the difference between the purchase price and the face value.

What are the different types of Treasury Bills in India?

The Indian government typically issues Treasury Bills with three different maturities:

• 91-day T-Bills
• 182-day T-Bills
• 364-day T-Bills

What is the minimum investment required for treasury bills?

The minimum investment amount for T-Bills varies based on RBI guidelines.

How do investors earn returns from treasury bills?

Investors earn returns from treasury bills through the price difference between the purchase cost (discounted price) and the redemption amount (face value). Since T-Bills are issued at a discount and redeemed at full value upon maturity, the discount represents the investor’s potential earnings.

Are treasury bills in India risk-free?

Treasury bills in India are considered relatively low-risk as they are backed by the Indian government. However, they are not entirely risk-free. While the risk of government default is minimal, investors may face interest rate risk if they sell before maturity, as market fluctuations can impact returns.

What is the maturity period of a treasury bill in India?

Indian Treasury Bills are issued with short-term maturity periods, typically 91 days, 182 days, or 364 days. These shorter durations make them a suitable choice for investors seeking short-term investment options.

Are treasury bills better than other available savings options?

They are not inherently ‘better’. The suitability of Treasury Bills depends on an investor’s financial goals and risk tolerance. T-Bills provide entail low risk and provide high liquidity, making them suitable for parking short-term funds. However, they do not offer capital preservation or guaranteed interest like fixed deposits or savings accounts. So, investors should evaluate where to invest based on their needs.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views / opinions or as an investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.