What are Treasury Bills? Benefits, Risks & Investment Insights

Treasury bills are a stable, short-term alternative to long-term, volatile investments. If you are seeking predictable performance, short-term returns, and peace of mind, they could be a suitable match for your investment strategy. But what exactly are Treasury bills, and are they the right choice for you? Keep reading to learn more and determine if they fit your financial goals. 

What are Treasury bills?

Treasury bills, also known as T bills, are short-term money market instruments issued by the Government of India through the Reserve Bank of India (RBI). They are a type of Government Security (G-Sec) that allows the government to raise funds while giving you a low-risk way to park your money. 

Treasury bills have maturities of less than a year and are sold at a discounted price, which allows you to purchase them for less than their face value, ultimately resulting in a profit. 

How do Treasury bills work? 

Treasury bills are issued in different short-term durations of less than one year. Since they are zero-coupon instruments, no interest is paid to investors. Instead, they are sold at a lower price and redeemed at their full value upon maturity.

The yield on Treasury bills is calculated using the following formula:

Yield = (100 - P) / P * [(365 / D) * 100]

Here, 

• P represents the discounted price of the Treasury bill
• D denotes the duration, expressed in days 

The face value of Treasury bills remains constant at ₹100. However, the discounted price, which is the price at which the bill is sold, varies based on RBI auctions and prevailing interest rates. 

The RBI auctions Treasury bills every Wednesday, and the settlement happens on the next working day after the auction on a T+1 basis. Each week, the RBI shares details of upcoming T-Bill issuances through a press release on its website. You can check the current T bill rates on RBI’s official website and plan your purchase accordingly.  

Types of Treasury bills 

Treasury bills are categorised based on their maturity period. There are three types:

1. 91-day Treasury bills
2. 182-day Treasury bills
3. 364-day Treasury bills

Benefits of investing in Treasury bills 

Here are some advantages of investing in Treasury bills:

1. Low risk 

Treasury bills are issued by the Government of India and auctioned by the RBI, which makes them a low-risk investment. 

2. Predictable return 

Treasury bills offer a fixed return upon maturity, unlike more volatile investments. When you purchase Treasury bills, you buy them at a discount, and you receive the full face value at maturity. If held to maturity, you do not have to worry about fluctuating Treasury bill rates or T bill rates. 

While Treasury bills do not pay periodic interest, the RBI announces an indicative yield before each weekly auction. So, you have a clear idea of the return you can expect.  

3. Liquidity 

Treasury bills are highly liquid due to their short-term maturities of 91, 182, or 364 days. This makes them an excellent option for parking your excess funds while maintaining easy access to them when needed. You can use them for your short-term goals. They can also be a safe place to keep your emergency funds. 

Risks associated with Treasury bills 

Treasury bills are generally considered low-risk investments. However, they still carry some potential risks that you should be aware of: 

1. Inflation risk 

While Treasury bills offer a guaranteed return, they may not keep pace with rising prices. As a result, the purchasing power of your returns could decrease over time.  

2. Opportunity cost risk 

Investing in Treasury bills could lead to missing out on better returns from alternative investments, such as stocks or mutual funds. While Treasury bills offer safety and liquidity, they typically provide lower growth potential, which could result in a lost opportunity for higher returns elsewhere. 

How do you invest in Treasury bills? 

You have two main options to invest in Treasury bills:

1. Through RBI Retail Direct 

The RBI Retail Direct allows individual investors to open an account with the RBI. You can simply visit the RBI Retail Direct website and complete the necessary Know Your Customer/Client (KYC) process. 

You can participate in the auction process conducted by RBI and buy Treasury bills directly from the portal after linking your savings bank account. For convenience, you can also download the RBI Retail Direct app, available on both the Play Store and the App Store. 

2. Through a stock broker or bank

Alternatively, you can open a trading and Demat account with a stockbroker or bank. This allows you to buy and sell Treasury bills without having to open a separate RBI Retail Direct account. 

Please note that Treasury bills are auctioned every week and issued through the RBI via a non-competitive bidding process. Additionally, the minimum investment amount for retail investors is ₹10,000. 

Who should invest in Treasury bills?         

Treasury bills can be suitable for a range of investors, including the following:

1. Conservative investors 

Treasury bills could be a good fit if you have a low risk appetite and prefer financial stability over the potential ups and downs of the stock market. They offer predictable returns and minimal risk, making them ideal for safeguarding your capital.

2. Investors with short-term goals 

If you are working towards financial goals that need to be fulfilled in the near future, especially in under one year, Treasury bills provide a safe, short-term investment option. Their short tenors make them suitable for achieving such time-sensitive goals. 

3. Retired investors 

Treasury bills can be an excellent choice for retirees who prioritise capital preservation over high returns. They allow you to park your funds securely while generating returns with minimal risk. This helps you maintain a stable income without exposing yourself to significant market fluctuations in retirement.

Conclusion 

Treasury bills offer several benefits, such as fixed returns, short tenures of less than a year, and minimal risk. However, they may struggle to keep pace with inflation and typically yield lower returns compared to equities. Make sure to weigh their benefits against their limitations to ensure they fit within your broader financial strategy.