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