Investors seeking potentially suitable returns along with liquidity may consider short-term investment options. Among these are treasury bills, or T-bills, one of the simplest and most widely recognised government-backed instruments.
Whether you are new to fixed income investing or looking to balance your portfolio, understanding how Treasury bills work and where they fit can help you make more informed decisions.
What are treasury bills?
Treasury bills are short-term debt instruments issued by the government to meet short-term funding needs. They are typically available with maturities of 91 days, 182 days, or 364 days. Since they are backed by the government, treasury bills may be regarded as low-risk instruments, making them a potential choice among investors seeking potentially stable options.
Instead of earning regular interest, treasury bills are issued at a discount to their face value. The investor receives the full face value on maturity, and the difference between the purchase price and maturity value represents the return earned. For example, if a treasury bill with a face value of Rs. 1,00,000 is issued at Rs. 98,500, the investor earns Rs. 1,500 on maturity.
For illustrative purpose only
How treasury bills work in practice
When you invest in treasury bills, you essentially lend money to the government for a short period. The government repays the full amount at the end of the maturity term. Since these instruments are auctioned by the Reserve Bank of India (RBI), they are accessible to both institutional and retail investors through primary and secondary markets.
Investors may purchase treasury bills directly through RBI auctions or indirectly through mutual fund schemes that invest in such securities. The short maturity period and fixed repayment timeline make them suitable for investors seeking liquidity and reduced exposure to market fluctuations.
Key features of treasury bills
- Short-term maturity: Treasury bills are available for up to one year, offering flexibility for investors who do not wish to lock in funds for long durations.
- Discount-based return: They do not offer periodic interest payments. Instead, the difference between the discounted purchase price and face value on maturity constitutes the return.
- Liquidity: Treasury bills are actively traded in the secondary market, which may help investors exit before maturity if required.
- Potentially stable option: Since treasury bills are issued by the government, they may potentially carry relatively low risk compared to corporate debt instruments.
Why investors may consider treasury bills
Treasury bills may be suitable for investors with short-term financial goals or those who wish to park surplus funds temporarily. They also appeal to conservative investors who prefer predictable maturity values over market-linked returns. Including treasury bills in a diversified portfolio may help balance overall risk, especially when combined with equity or hybrid mutual fund holdings.
Further, these instruments are often used by fund managers to manage liquidity within schemes such as liquid funds or money market funds. Their transparent pricing and defined maturity structure contribute to their importance in the short-term debt market.
Comparing treasury bills with other short-term options
While fixed deposits and savings accounts are common short-term avenues, treasury bills differ in structure and returns. They are issued at a discount and redeemed at face value, without any interest payout during the tenure. Additionally, since they are backed by the government, the credit risk may relatively be lower than that of bank or corporate deposits.
However, investors should also note that treasury bill yields may fluctuate depending on prevailing interest rates. Therefore, returns are not fixed and may vary based on market conditions and timing of purchase.
Accessing treasury bills through mutual funds and ETFs
Investors who wish to gain exposure to treasury bills without directly participating in RBI auctions may consider mutual fund schemes that invest in such securities. Debt-oriented mutual funds, including liquid and money market funds, often allocate a portion of their portfolio to treasury bills for liquidity and stability.
In recent years, some ETF options have also provided indirect access to treasury bills or similar short-term government securities. These allow investors to invest in a diversified portfolio of government instruments through a single traded unit. However, investors should carefully assess the investment objective, expense ratio, and liquidity of the ETF before investing.
Conclusion
Treasury bills may serve as a potentially stable, short-term investment avenue for those looking to manage liquidity or park surplus funds. Their government backing, predictable maturity value, and flexible tenures make them a widely recognised choice within the fixed-income space. Whether invested directly or through mutual funds and ETFs, treasury bills may complement a diversified portfolio by offering a balance between liquidity and reduced volatility.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully. This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.
