What are Treasury Bills: Meaning, Benefits and How to Buy?

What are T-bills? What are the benefits, risks, and investment strategies of T-bills? How are T-bills risk-free? We’ll uncover all such questions in this blog.

What are T-bills?

Treasury bills, also known as T-bills, are short-term instruments (maturity less than a year) issued by the government.

It is one of the safest investments as it is backed by the financial stability of the government.

T-bills don’t give any interest. So, how do investors make profits? These are zero coupon investments that are issued at a discount to fair value and have a maturity of a year or less.

Example: Let’s consider a T-bill with a face value of INR 1,00,000 of maturity 3 months. The investor buys the T-bills at INR 99,000 (at a discount) and receives INR 1,00,000 after 3 months. In this case, the investors earn INR 1,000

Issuers of T-bills

T-bills are issued by the government to meet short-term needs and manage the liquidity. In India, T-bills are issued by the RBI (Reserve Bank of India) on behalf of the government. As of April 2024, we have three different types of T-bills based on the maturity: 91 days, 182 days, and 364 days.

Did you know?

In India, the Reserve Bank of India issued the first T-bills in 1917.

How do T-bills work?

• Issuance – T-bills are issued through auctions, including competitive and non-competitive auctions on behalf of the respective treasury departments or central bank, i.e. the RBI.
• Competitive Auctions – Investors place bids for yield rates they are willing to accept. Until the authorities issue the required securities, the top bids are accepted first.
• Non-competitive Auctions – Investors accept the yield that has been previously decided. Small institutions and individual investors usually prefer this kind of auction.
• Maturity Period – T-bills are generally issued for 3 months, 6 months, and a year. Currently, in India, we have T-bills for 91 days, 182 days, and 364 days. Investors may choose the maturity according to their investment time horizon and liquidity needs.
• Discount / Interest – Unlike other coupon-bearing bonds, T-bills don’t pay coupons or interest. Instead, the investor earns at the time of maturity when the government repays the face value of the T-bill.
• Secondary Market Trading – T-bills can be traded in the secondary market before maturity, offering liquidity and flexibility to investors. Secondary market trading refers to the buying and selling T-bills between investors before the maturity date, which generally happens on exchanges, i.e., NSE and BSE in India. In the secondary market, the market price of T-bills fluctuates according to the market demand of the securities. Transacting in the secondary markets may incur fees or charges, including brokerage or commissions.

A T-bill is said to be at a premium if its market price is greater than the face value. This means that there is more demand than supply in the secondary market. Conversely, if the T-bill has a market price lower than the face value that means it is trading at a discount.

Benefits of Investing in T-bills

• Safety – T-bills are safe havens for investors because they are backed by the government. They are preferred by investors who don’t want to take much risk and secure their capital.
• Liquidity – T-bills are highly liquid investments offering flexibility to investors to rebalance or adjust portfolio easily.
• Short-term Horizon – T-bills allow investors to invest for a short-term. They can park their funds temporarily in T-bills while awaiting other investment opportunities.
• Predictable – T-bills offer a fixed rate structure, allowing investors to predict the rate of return with certainty, unlike other securities like equity, hedge funds, and many others.
• Diversification – T-bills have a low correlation with other securities like equity and real estate. Including T-bills in the portfolio helps the investors to reduce overall portfolio risk and enhance risk-adjusted returns.

Read Also: Why Debt Funds Are Better Than Fixed Deposits of Banks?

Risks associated with T-bills

• Interest Rate Risk: The market price of T-bills fluctuates in the secondary market according to the interest rate. When interest rates rise, T-bills are discounted at a high rate, leading to lower prices and capital loss for investors.
• Inflation Risk: The real rate of return earned on a T-bill may be negative in case inflation exceeds the rate of return earned. This deteriorates the purchasing power of investors.
• Call Risk – These risks are associated with only special types of T-bills that are callable T-bills. In callable T-bills, the government has the option to redeem them before their maturity date.
• Regulatory or political risk: Political instability or any other regulatory changes may affect the returns.

Investing in T-bills

Investors can invest in T-bills through direct purchase from the treasury or from brokers or dealers. A Primary Dealer (PD) or a Scheduled Commercial Bank is authorized to deal in government securities, including T-bills, in India. Some of the major PDs in India include the State Bank of India (SBI), ICICI Bank, HDFC Bank and Axis Bank and many others.

One can also buy T-bills via the RBI Retail Direct Platform. If you’re unaware of this platform, then checkout our blog on the same: Reserve Bank of India : Retail Direct Platform

Further, T-bills trade on an exchange post issuance, which means you can also buy/sell them in the secondary market, i.e., the NSE and BSE.

Read Also: What is TREPS & Why Mutual Funds Invest in it?

Conclusion

In today’s dynamic financial landscape, understanding the characteristics, benefits and risks of investing in T-Bills can allow investors to make informed decisions aligned with their investment objectives and financial goals. T-Bills offer straightforward and transparent investment opportunities, and their simplicity, safety and short-term nature make them a preferred choice for investors seeking liquidity, capital preservation, and predictable returns. But it also comes with risks that the investors should consider before making any decisions.

Frequently Asked Questions (FAQs)

Disclaimer: The securities, funds, and strategies mentioned in this blog are purely for informational purposes and are not recommendations.