What are Treasury Bills? Should you invest in them?

Not all investors may be inclined to invest their money in fixed deposits to grow their wealth in the short run. They look for alternative and equally safe investment options like Treasury Bills. These bills also known as T-bills are short-term debt instruments issued by the Government of India. These instruments are sold at a discounted price, and upon maturity, they are redeemed at their complete face value. Consequently, investors who purchase T-bills can earn a return on their investment by capitalizing on the difference between the discounted purchase price and the face value received at the time of maturity.

T-bills are offered in three different tenors:

• 91 days
• 182 days
• 364 days

T-bills are issued in three tenors, each known by distinct names based on their characteristics. The 91-day T-bill is referred to as the “cash bill” due to its high liquidity, making it the most readily tradable among the three. The 182-day T-bill is known as the “quarterly bill” as it matures in three months. Finally, the 364-day T-bill is termed the “long-term bill” since it takes a year to mature.

These T-bills are offered to investors through an auction process organized by the Reserve Bank of India (RBI). The RBI discloses the auction schedule and the number of T-bills to be auctioned. Investors can place bids for T-bills using the RBI's electronic bidding platform. The RBI then establishes the cut-off yield for each tenor, and bids at or below this yield are deemed successful.

Investing in T-bills in India offers various advantages:

• Safety: Treasury bills are government-backed, ensuring a highly secure investment.
• Liquidity: These bills are easily tradable, providing high liquidity to investors.
• Yield: Treasury bills offer relatively attractive yields, especially for short-term investment strategies.
• Tax benefits: The interest earned on Treasury bills is tax-free up to a specified limit.

However, there are also some drawbacks to consider:

• Low returns: Compared to other investment options like stocks or bonds, the returns on Treasury bills are relatively modest.
• Short maturity: Investors need to reinvest their money after the short maturity period of Treasury bills.
• Interest rate risk: The value of Treasury bills can be affected by changes in interest rates; if rates rise, the value of the bills may fall.

Before investing in these bills in India, consider the following factors:

• Tenure: The tenor of the T-bill, as it determines the investment period.
• Yield: The cut-off yield established during the auction.
• Liquidity: The liquidity of the T-bill, which influences the ease of buying and selling.
• Taxability: Tax implications related to investing in T-bills, ensuring compliance with tax regulations.

T-bills are highly favoured by both individuals and institutions as they are considered a secure investment, being backed by the Government of India. Moreover, they offer relatively high yields, particularly for short-term investment horizons.

Who should and should not invest in T-Bills?

Individuals who should consider investing in Treasury bills are:

• Those seeking a safe and liquid investment: T-bills are ideal for individuals looking for a secure and easily tradable investment. Being government-backed, the likelihood of default is minimal, and their high liquidity ensures easy buying and selling.
• Those seeking a high yield: T-bills provide attractive yields, especially for short-term investment needs, making them suitable for individuals seeking relatively higher returns without assuming excessive risk.
• Those saving for short-term goals: T-bills suit individuals saving for short-term objectives, such as a down payment on a house or car. The short maturity period allows them to mature in time for the funds' use toward their goal.

However, there are individuals who may not find T-bills suitable:

• Those seeking high returns: T-bills do not offer exceptionally high returns. If individuals are seeking higher returns, exploring other investment avenues like stocks or bonds might be more suitable.
• Those uncomfortable with short-term investments: Given their short maturity, T-bills may not be the best fit for individuals who prefer longer-term investment options.

If contemplating investing in Treasury bills, it is essential to conduct thorough research and seek advice from a financial advisor to assess their suitability based on individual investment objectives and risk tolerance.