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What is Treasury Bill & how do they work?
When it comes to safe and reliable investment options, Treasury Bills stand out as one of the most secure short-term instruments. Designed primarily for those who prioritise safety and liquidity, these government-backed securities offer a way to park your money with minimal risk.
What is a Treasury Bill?
A Treasury Bill (T-Bill) is a short-term debt instrument issued by the Indian government through the Reserve Bank of India (RBI). T-Bills are zero-coupon securities, meaning they don’t pay interest. They are issued at a discount, allowing you to profit from the difference between the purchase price and the face value upon maturity.
How do Treasury Bills work in India?
T-Bills are issued in India with tenures of 91 days, 182 days, 364 days. They are auctioned by the RBI, you can buy them through competitive or non-competitive bidding. In competitive bidding, you specify your desired yield, while in non-competitive bidding, the RBI decides the yield, which is ideal for retail investors. Upon maturity, you receive full face value of T-Bill.
T-Bill types and maturities
In India, you can invest in three types of T-Bills based on their maturity:
- 91-day T-Bills: Short-term, maturing in 91 days.
- 182-day T-Bills: Slightly longer, maturing in 182 days.
- 364-day T-Bills: The longest option, maturing in 364 days.
Features of Treasury Bills
- Minimum investment - The minimum investment amount in Treasury Bills is ₹25,000, making it accessible for retail investors. Investors can purchase T-Bills in multiples of ₹25,000
- Zero-coupon securities - T-Bills are zero-coupon securities. They do not pay periodic interest like other bonds or fixed deposits. Instead, the return is embedded in the discount at which these bills are issued.
- Yield rate on Treasury Bills - The yield on T-Bills depends on the difference between the purchase price and the face value. For example, if you buy a ₹100 T-Bill at ₹98, your yield is around 2%.
Advantages of Treasury Bills
- Risk-free: Treasury bonds are one of the safest options as they are backed by the government and therefore risk-free.
- Liquidity: T-Bills offer excellent liquidity as they have short maturities, allowing you to convert them to cash quickly.
- Non-competitive bidding: Retail investors benefit from non-competitive bidding, where RBI decides the yield, simplifying the investment process.
Limitations of Treasury Bills
- Low returns: While T-Bills are safe, they generally offer low returns compared to other investments like equities.
- Taxation: The gains from Treasury Bills are subject to taxation under the Income Tax Act. The difference between the purchase price and the face value is treated as short-term capital gain.
- Affected by inflation: Since T-Bills offer fixed returns, high inflation rates can reduce the purchasing power of the returns, leading to a real return that might be lower than expected.
Also Read: Maximize returns with short-term investments
Conclusion
Treasury Bills are a great option if you seek a secure, short-term investment. They offer safety, liquidity, and simplicity, making them ideal for conservative investors. However, consider the lower returns and tax implications before investing. For those seeking a blend of safety and liquidity in their investment portfolio, Treasury Bills could be the perfect choice. Shorter maturity Debt Funds like liquid funds, money market funds etc. can be a good option if you want to indirectly invest in T-bills, as they invest in a mix of short maturity instruments including T-bills.
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
Mutual Fund investments are subject to market risk, read all scheme related documents carefully. Axis Bank Ltd is acting as an AMFI registered MF Distributor (ARN code: ARN-0019). Purchase of Mutual Funds by Axis Bank’s customer is purely voluntary and not linked to availment of any other facility from the Bank. T&C apply.
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