• HDFC securities
• 20 Feb 2023
• Knowledge Centre

 

Just like how a company issues shares or bonds to raise funds, a government also has certain methods to raise funds. Treasury bills are issued by the government to raise funds to finance its short-term requirements. These securities act like promissory notes offering guaranteed repayment at a future date.

Treasury bills can be a good investment option for risk-averse investors as these instruments are backed by the sovereign guarantee and hence carry no risk. An investor can invest in the government’s treasury bills at a discount to the face value. At the time of maturity, the investor can redeem these instruments at the nominal value and earn the difference as their profit.

The Reserve Bank of India (RBI) issues Treasury bills as part of its open market operations. These instruments are typically short-term investments with the maximum tenure being 364 days.

For example, one can make a treasury bill investment at a discounted price of Rs 148 for a bill with a face value of Rs 150. Once the maturity period is reached, the investor can redeem the bill at the face value of Rs 150. In this way, he earns a profit of Rs 2 in the short term.

As an investor, it is crucial for one to know the different types of treasury bills and their features.

Types of treasury bills

Treasury bill investments are categorized based on their tenure. Although the tenure remains constant, the discount rate and face values change depending on the number of bids, RBI policy and requirements of funds. These are the different types of treasury bills.

• 14-day treasury bill
• 91-day treasury bill
• 182-day treasury bill
• 364-day treasury bill

Features of treasury bills

Interest Rate

When it comes to treasury bill interest rate, these instruments are zero-coupon bills. This means that the investments don’t earn any interest rate. These instruments are issued at a discounted rate and upon maturity, redeemed at face value. The profit earned by the investors is subject to short-term capital gains tax.

Minimum investment amount

An investor should note that a minimum investment of Rs 25,000 is needed to invest in treasury bills. Investments can be made only in multiples of Rs 25,000.

Liquidity

Treasury bills are highly liquid and can be easily bought and sold in the secondary market. An investor can invest in these bills through auctions which are held by the RBI, on behalf of the government of India. Investors can also invest in these bills through commercial banks or primary dealers.

Investing in Treasury bills offers several advantages to investors:

• Treasury bill investments are often considered to be risk-free as they are backed by the government.
• Treasury bills are a good short-term investment option as the maximum tenure is 364 days. This can be ideal for investors that want to park some idle funds.
• Retail investors can easily bid for treasury bills at the auctions held by the RBI.

It is important to note that treasury bills offer a lower return compared to other investments such as stocks or bonds, but they also have a lower level of risk. As with any investment, it’s important to understand your own investment goals and risk appetite before investing.