Government securities (G-Sec) are often known for their safety and guaranteed returns. And in this post, we’re going to discuss one of the G-Sec – Treasury Bills, often referred to as T-bills.
We’ll help you understand what T-Bills are, how they work, and whether you should invest in them.
Estimated read time: 4 minutes and 58 seconds
Buckle up. Here we go!
Okay, so a quick brief about Government Securities.
Imagine you’re lending money to the government, and they promise to pay you back with a bit of extra cash as a token of appreciation for your money and trust. Well, that’s precisely what Government Securities are all about.
A Government Security (G-Sec) is a tradeable instrument issued by the Central Government or the State Governments. It acknowledges the Government’s debt obligation. And there are three major types of G-Sec. They are –
- Treasury Bills (T-bills) – Bonds issued by the Central Government with less than 1 year of maturity
- Government Bonds – Bonds issued by the Central Government with more than 1 year of maturity
- State Development Loans (SDLs) – Bonds issued by the State Governments
And in this post, we will focus on Treasury Bills (T-bills).
What are Treasury Bills?
T-bills are short-term debt instruments issued by the RBI on behalf of the government to raise funds. They are one of the safest investments out there because, in essence, you’re lending money to the government, which is typically a reliable borrower.
Based on the maturity period, there are three variants of T-bills. They are 91 days, 182 days, and 364 days. With a minimum investment amount of ₹10,000, the Treasury bills are zero coupon bonds as they pay no interest. T-bills are issued at a discount to their face value, and upon expiry, it’s redeemed at their face value.
If you are new to the concept of bonds, check out our bond series, where we have covered the basics of bond investments.
How do treasury bills work?
The RBI auctions T-bills almost every week, with maturities ranging from 91 days (3 months) to 364 days (1 year). You can check the future auctions here.
Here’s a simplified step-by-step guide to how T-bills work:
- Auction process: The RBI announces the auction dates and the amount of T-bills it intends to sell. Investors, including banks, and financial institutions, submit bids specifying the quantity of T-bills they want to purchase and the yield (interest rate) they are willing to accept. This process is similar to IPOs.
- Competitive bids: These are bids from large investors who specify the yield they desire. The RBI accepts bids starting from the lowest yield and moving upwards until the entire issue is subscribed.
- Non-competitive bids: These are bids from retail investors who are willing to accept the yield determined by the competitive bidding process. All non-competitive bids are accepted in full.
- Allotment: The RBI then determines the cutoff yield, which is the highest yield at which it can sell the T-bills and still meet its borrowing requirements. Competitive bidders who bid below this cutoff yield receive T-bills, while non-competitive bidders receive them at the cutoff yield.
- Investment period: Once you have successfully bid for T-bills, you hold them for the specified duration, which can range from 91 days to 364 days.
- Maturity: At the end of the maturity period, the government pays you the face value of the T-Bill, and the difference between this face value and the amount you paid for the T-Bill represents your capital gain earnings.
Now that you understand how T-bills work, let’s explore the advantages of investing in them:
- Safety: Treasury bills are one of the safest investment options because they are backed by the Indian government. The likelihood of default is extremely low.
- Short-term investment: T-bills have relatively short maturities, making them suitable for those who want to park their money for a few months without committing to long-term investments.
- Competitive returns: While T-bills are low risk, they typically offer better returns compared to traditional savings accounts or fixed deposits of similar duration.
- Predictable returns: Returns of T-bills are known in advance because they are based on the yield at the time of purchase. This predictability can be reassuring for investors. You can check the tenor-wise indicative yields from the previous auction here.
- Tax benefits: You don’t earn any interest from T-bills. The capital gain earned is considered as Short Term Capital Gain (STCG) and is taxed as per your tax slab. And unlike Fixed Deposits (FD), no TDS is deducted on T-bill redemption.
While T-bills offer many benefits, it’s essential to consider their drawbacks as well:
- Low liquidity: While you can sell T-bills in the secondary market before maturity, the volume in the secondary market is low. This might increase the chances of selling your T-bills at lower prices in times of emergency. You can check the secondary market volume here.
- Lower returns: T-bills generally offer lower returns compared to other investment options like corporate bonds. This makes them less attractive to investors seeking higher yields. But these higher yields come with higher risk.
- Interest rate risk: If you buy T-bills with longer maturities, you might be exposed to interest rate risk. If market interest rates rise after you’ve purchased T-bills, their value in the secondary market may fall.
Why and when should you invest in treasury bills?
Now, the big question – why and when should you consider investing in T-bills?
- Emergency fund: T-bills can serve as a safe haven for your emergency fund. Their short tenures make them accessible when unexpected expenses arise, and you’ll earn a little extra while your money sits there. But remember, it’s always better to split your emergency fund and only invest a portion of it in T-bills.
- Short-term goals: If you have short-term financial goals, like saving for a vacation or a down payment on a house, T-bills can be a suitable place to park your money until you need it.
- Portfolio diversification: T-bills can also play a role in diversifying your investment portfolio. Combining them with other assets like stocks and bonds can help spread risk.
- Preservation of capital: For conservative investors who prioritize safety over high returns, T-bills are an ideal choice. They allow you to preserve your wealth while minimizing the risks associated with more volatile investments.
In a nutshell, Treasury Bills (T-bills) are government-backed, short-term investments that offer safety, liquidity, and predictable returns. They are an ideal choice for those looking to preserve capital, park emergency funds, or meet short-term financial goals.
However, it’s essential to balance your investment portfolio and consider other options if you seek higher returns or have a longer investment horizon.
Remember, personal finance is all about aligning your investments with your financial goals and risk tolerance. T-bills are just one tool in your financial toolkit, and they can play a vital role in helping you achieve your financial objectives.
That’s it for today, buddies. Stay tuned for more insightful newsletters on personal finance topics that matter to you.
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