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What is a Treasury Bill?
- A Treasury bill is a short-term debt instrument issued by the government. Because the government’s creditworthiness supports it, it is regarded as one of the safest investment options available.
- Because T-bills do not pay interest on a regular basis during their tenure, they are also known as zero-coupon securities. Rather, they are distributed at a price lower than their face value.
- The difference between the discounted purchase price and the face value represents the return you earn upon maturity.
- For instance, a discounted price of Rs. 128.40 can be obtained for a 91-day Treasury bill with a face value of Rs. 130. Individuals can realize a profit of Rs. 1.60 upon maturity, as they are eligible to receive the full nominal value of Rs. 130.
Why Does the Government Issue Treasury Bills?
- Raise Capital
T-bills help the government to raise money quickly. The government can raise more money with the help of a short-term Treasury bill to meet its current obligations, which are in excess of its annual revenue generation. This money covers things like budget shortfalls or paying for other governmental operations.
Regulate Currency Circulation
- T-Bills help the government control the amount of money floating in the economy. The government lowers inflation by taking out the excess money in circulation in the market through the sale of T-Bills. It effectively curbs the surging demand rates, and in turn, high prices hurting the poorer sections of the society.
Alternatively, the RBI implements a contractionary OMO regime during recessions and slowdowns by reducing the circulation of Treasury bills and the bonds’ respective discounted values. It discourages people from investing in this area, increasing cash flows to the stock markets in its place and ensuring a boost in the productivity of most companies. Such a rise in productivity has a positive impact on the GDP and aggregate demand levels in an economy.
Types of Treasury Bill
The following list of treasury bill types is used to distinguish between them according to their tenure:
| Type | Maturity Period | Auction Frequency | Average Returns |
| 91-day T-bills | 3 months | Every Wednesday | 6.75% |
| 182-day T-bills | 6 months | Every Wednesday | 6.91% |
| 364-day T-bills | 1 year | Every Wednesday | 6.96% |
Source: Business Standard
Various investment horizons are available to you with these T-bills based on your preferences and financial objectives. Each type provides a short term investment opportunity with varying durations.
The face value and discount rate of these bonds fluctuate over time based on the RBI’s monetary policy, funding needs, total bids made, and other factors.
Pros of Treasury Bills
- Secure and liquid investment:
Treasury bills are one of the most popular short-term government schemes issued by the RBI and are backed by the central government.
T-bills are a great investment option for investors seeking a less risky and more liquid investment. Being government-backed, the risk of default is less, and their high liquidity ensures easy trading. T-bills can also be easily converted into cash in an emergency by selling them on the secondary market.
- High Returns:
T-bills are a good option for people seeking comparatively higher returns without taking on any risk because they yield higher returns than other securities in the short term.
- Diverse Maturity Periods:
T-bills offer a range of maturity periods. This allows you to choose the maturity period that aligns with your investment goals.
- Non-competitive bidding:
Every week, the RBI holds a non-competitive auction of Treasury bills, which enables retail and small-scale investors to participate without having to provide the yield rate or price. It raises the amount of money flowing into the capital market by exposing more novice investors to the government securities market.
- Regular Issuance:
T-bills are regularly auctioned off by the government, ensuring you have a continuous supply of investment opportunities. This provides flexibility in terms of maturity and allows you to invest in T-bills as per your preferences.
Portfolio Diversification:
T-bills are valuable for diversifying your investment portfolio. They are low-risk assets that balance your overall risk profile.
Cons of Treasury Bills
Relatively Low Returns
The main drawback of government treasury securities is that they are known to generate relatively lower returns when compared to standard stock market investment tools. The returns expected are relatively low, ranging between 3.39% to 6.63%, based on the holding period of the treasury bill.
Taxable profits
The profits earned are taxed as short-term capital gains that must be added to overall income and taxed as per the income bracket. Additionally, Treasury bills do not qualify for any tax deductions under Section 80C of the 1961 Income Tax Act.
So Investors who are looking for safe and high returns investments can invest their money in real estate structured debt through platforms like Assetmonk, which offers an assured IRR of 17%. Signature Series B is Assetmonk’s latest safe investments with high returns in India offering minimal investment of just 10 Lakhs and a silver lining comes in the form of potential tax benefits where investors can claim tax benefits of up to Rs 50,000.
How to Buy Treasury Bills in India?
1. Primary Auctions
You can participate in auctions conducted by the Reserve Bank of India (RBI). Eligible parties, including banks and specific non-banking financial companies, are invited to submit bids.
2. Secondary Markets
After the initial auction, T-Bills are listed and traded on the secondary market. You can purchase T-bills on the secondary market by contacting a bank that deals in government securities or through a broker.
3. Retail Direct Gilt (RDG) Account
A registered intermediary, such as a bank or non-banking financial institution, is where you can open an RDG account. This will let you directly transact with government securities, including T-Bills.
Factors That Can Influence the T-Bills Price
- Economic Conditions:
When the interest rates on T-bills go up, the prices of T-bills you already have tend to decrease. People go elsewhere in search of better returns, which is why this occurs. Conversely, T-bill prices typically increase in response to decreases in T-bill interest rates.
- T-Bill Interest Rates:
How the economy is doing, like whether prices are going up (inflation), the economy is growing, or there are many people without jobs, can affect T-bill prices. Especially if people expect prices to go up a lot, they might want to buy T-bills to protect their money.
- Government Actions:
Treasury bills can also be affected by government actions; for example, if the government decides to alter the interest rate on T-bills, purchasing them may result in changes to monetary or fiscal policy.
- Supply and Demand:
If there is a large demand for Treasury bills but not enough supply, the price will rise. But Prices may go down if only a few people want to invest in them or there are too many available.
- Market Sentiments:
Treasury bill prices can occasionally be influenced by public sentiment regarding the stock market and the economy. If people worry about what’s happening in the world or there’s a big financial problem, they might want to buy T-bills, which can increase their prices.
Bottom Line
A balanced investment portfolio has a mix of equity-based and debt-based based instruments. It also consists of a combination of sovereign-guaranteed instruments and private sector investment opportunities. If you are in the process of building your portfolio, it is essential to start diversifying with a mix of these elements.
Investing in treasury bills is a promising way to diversify your portfolio and build more safety and security into it. Liquidity is a bonus that allows you to access funds within a year of investing.
T-bills provide a secure and low-risk investment avenue for individuals and institutions in India. With their attractive features and ease of investment, T-bills can be valuable to your investment portfolio. Before investing in Treasury bills, you must consider your financial goals, risk tolerance, and investment horizon. Moreover, remember to consult with a financial advisor to make informed decisions.
As one of the leading platforms for alternative investment in India, Assetmonk offers individuals the opportunity to invest in fixed-income assets through real estate structured debts. With a minimum investment of 10 lakhs and an assured IRR of 17 percent, Assetmonk provides exclusive, secure and tailored investment options to its valued clients. Additionally, investors may also be eligible for a potential tax benefit of up to Rs. 50,000.
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FAQs
Q1. What is the difference between treasury bills and government securities?
A. Government Security is a tradable investment instrument issued by the Central Government or the State Governments. They can be either long-term (usually referred to as government bonds or dated securities with a maturity of one year or more) or short-term (usually referred to as treasury bills, with maturities of less than one year).
Q2. What is the minimum amount you can invest in T-bills?
A. To purchase 91-day, 182-day, and 364-day Treasury Bills, you must invest a minimum of INR 10,000 per lot. You can also purchase more treasury bills in multiples of INR 10,000.
Q3. What is the 1 year T bill rate?
A. According to WintWealth, the September 2023 data shows, a 1 year T-bill yield in India is 7.042%.
Q4. Can I sell the T-bills?
A. Yes, you can sell treasury bills in the secondary market before maturity.
