When it comes to reliable investment options, Treasury Bills are usually considered one of the safest short-term instruments. Let us understand them better, determine how they work, consider their various types, and explore their benefits.
Overview of Treasury Bills
Treasury Bills are money market instruments. The Government of India issues them as promissory notes with guaranteed repayment at a future date. A Treasury Bill is also known as a T-Bill. It is a zero-coupon security. Consequently, it does not pay any interest. Instead, when you invest in a T-Bill, it is issued at a discount. This enables you to profit from the difference in the purchase price and the face value at maturity.
T-Bills are short-term Debt instruments. Funds collected through them are typically used to meet short-term requirements of the government.
How do Treasury Bills work?
When you opt for T-Bills, they are issued at a discount to the original value. Instead, as a buyer, you get the original value upon maturity. For example, you can avail yourself of a Rs. 100 T-Bill at Rs. 95. However, you will be paid Rs. 100 on the maturity date. The return on T-Bills depends on the liquidity position in the economy. Consequently, when there is a liquidity crisis, the returns are higher, and vice versa.
Types of Treasury Bills
The GoI issues T-Bills through the RBI. There are various kinds of T-Bills based on their tenure. These usually include:
- A 91-day T-Bill
- A 182-day T-Bill
- A 364-day T-Bill
The holding period for various types of Treasury Bills stays the same. However, their discount rates and face values change periodically based on the monetary policy and funding needs of the RBI, as well as the total bids placed. In 1997, the government issued 14-day immediate T-Bills.
Benefits of Treasury Bills
The various advantages of T-Bills include:
- Non-competitive bidding
The RBI auctions T-Bills every week using non-competitive bidding. This lets small-scale and retail investors participate in such bids without quoting the yield rate or price. This enhances the exposure of amateur investors to the government securities market, which creates higher cash flows to the capital market.
- Risks free
If you are looking to invest in Bonds, you can check T-Bills, too. Treasury Bills are often considered one of the most secure options. They are backed by the government. Hence, they are risk-free.
- Offers liquidity
Treasury Bills are highly liquid. This is because they have short-term maturities. It allows you to convert the T-Bills to cash quickly. Hence, if you want to generate short-term gains using secure investments, you can choose Government Treasury Bills. In addition, you can resell them in the secondary market. This enables you to convert your holdings into cash in an emergency.
Conclusion
T-Bills are issued when the government needs money for a short period. They offer advantages like high liquidity, security, etc., and are usually considered ideal for risk-averse investors.