Treasury Bills: A Good Investment for Retirement?

Asefa Hafeez

2 years ago

Table of Contents

What Is Bond?

Bonds are investment securities in which an investor lends money to a corporation or government for a specified time period in exchange for interest payments. When the bond matures, the issuer returns the investor’s principal. Fixed income is a word frequently used to characterise bonds, as your investment earns fixed payments throughout the bond’s lifetime.

Bonds are issued by corporations to finance existing operations, new initiatives, and acquisitions. Governments issue bonds for financing purposes and to complement tax revenue. When you purchase a bond, you become a creditor of the entity issuing the bond.

Numerous types of bonds, particularly investment-grade bonds, are lower-risk investments than equities, making them an essential component of a diversified investment portfolio. Bonds can mitigate the risk associated with more volatile investments, such as equities, and provide a stable income stream during retirement while protecting money.

What Are Treasury bills?

Treasury bills (type of government bond or securities) are money market securities issued by the Government of India in the form of a guaranteed promissory note with a future maturity date. Funds acquired through such instruments are often utilised to cover the government’s short-term needs, hence reducing a country’s overall fiscal deficit. They are typically short-term borrowing instruments with a maximum maturity of 364 days and a zero coupon rate. They are issued at a discount to the nominal value of government securities as reported (G-sec).

Individuals can purchase government treasury bills at a discount to their face value, and they are redeemed at their face value, allowing investors to pocket the difference. For instance, a 91-day Treasury bill with a face value of Rs 120 can be purchased for Rs 118.40 at a discount. Individuals are eligible to receive the full nominal value of Rs. 120 upon maturity, allowing them to realise a yield of Rs. 1.60. Now, consider additional essential Treasury Bill facts.

A short-term treasury bill enables the government in meeting its present obligations, which exceed its annual revenue output. Its issuance aims to reduce an economy’s total fiscal deficit and regulate the total amount of money in circulation at any given time.

As part of its open market operations (OMO) strategy, the Reserve Bank of India (RBI) also issues such treasury bills in order to moderate the country’s inflation rate and citizens’ spending/borrowing habits. During periods of economic expansion that result in high and sustained inflation rates, the government issues high-value treasury bills to the people, reducing the economy’s total money supply. It efficiently restrains the rising demand rates and, consequently, the high prices that harm the weaker segments of society.

Alternatively, the RBI implements a contractionary OMO regime during times of recession and economic slowdown by reducing the circulation of Treasury bills and the discounted value of the associated bonds. It discourages individuals from investing in this industry, hence increasing cash flows to the stock markets and raising the productivity of the majority of enterprises. Such an increase in productivity has a beneficial effect on the GDP and aggregate demand in an economy. Consequently, a treasury bill is an essential monetary instrument used by the RBI to regulate the entire money supply in an economy, as well as for fundraising purposes.

Types of Treasury Bills

Based on their maturity, the following distinctions are made between the various types of Treasury bills:

14-Day Treasury Bill

These bills mature fourteen days after the date of issuance. They are auctioned off on Wednesday, and payment is made the following week on Friday. The auction is held weekly. These bills are sold in multiples of one lakh rupees, and the minimum investment is also one lakh rupees.

91-Day Treasury Bill

These bills reach maturity 91 days after the date of issuance. They are auctioned off on Wednesday, and payment is made the following week on Friday. Each week, they are auctioned off. These bills are sold in multiples of Rs.25,000, and the minimum investment amount is Rs.25,000.

182-Day Treasury Bill

These bills reach maturity 182 days after the date of issuance. They are auctioned on Wednesday, and payment is due the following week on Friday, when the term expires. They are sold at auction every other week. These bills are sold in multiples of Rs.25,000, and the minimum investment amount is Rs.25,000.

364-Day Treasury Bill

These bills reach maturity 364 days after their date of issuance. They are auctioned on Wednesday, and payment is due the following week on Friday, when the term expires. They are sold at auction every other week. These bills are sold in multiples of Rs.25,000, and the minimum investment amount is Rs.25,000.

As stated previously, the holding period for each bill stays unchanged. Treasury bills’ face value and discount rates are subject to periodic adjustment. This depends on RBI’s monetary policy and financial needs, as well as the total number of bids received.

In addition, the Reserve Bank of India publishes an auction calendar for treasury notes. Before each auction, it discloses the exact date of the auction, the amount to be auctioned, and the maturity dates.

Features Of Treasury Bills

Individuals wishing to purchase a short-term treasury bill must invest a minimum of Rs. 25,000 in accordance with RBI requirements.

Zero-coupon securities: Total deposits do not yield interest on G-Sec Treasury Bills. As such securities are offered at a discount on the market, investors stand to realise capital gains from such transactions. The whole par value of this bond is given to investors upon redemption, allowing them to realise high returns on total investment.

The technique of investment is fundamental to the essential aspects of a Treasury Bill. The RBI, on behalf of the central government, auctions such securities every Wednesday (depending on the total bids submitted on major stock exchanges) in the market. Investors may acquire such government assets through depository participant commercial banks or other registered primary dealers (PDs), with a T+1 settlement mechanism for the security transfer.

Alternately, many open-ended mutual funds incorporate treasury bills in their corpus for investors interested in these products.

Government securities are a safe investment that guarantees a fixed income to investors. Compared to the primary market, the liquidity of the secondary market is greater. As a result, retail investors profit from substantial secondary market liquidity, and you can sell promptly there.

Regarding government securities, no tax is deducted at the source. The premium, face value, and interest rate cannot be adjusted after the security has been issued because they are established at the time of issuance.

The Government of India issues Treasury bills and government bonds. The ability to store dematerialized government securities is offered to investors. When the securities are redeemed, they are returned at face value. Government securities have maturities ranging from two to thirty years.

Advantages of Treasury Bills

Investing in Treasury Bills has several advantages, as it offers investors protection and security.

Minimal Risk

Treasury bills are common short-term government securities backed by the central government. They constitute a liability for the Indian government because they must be paid within a specified time frame. Since they are supported by the government of India, the highest authority in the country, investors can have complete peace of mind regarding their investments. The sum must be paid to the investors regardless of the economic downturn.

Liquidity

As noted previously, a government treasury bill is issued as a short-term source of funding and has a maximum maturity of 364 days. Individuals seeking to create short-term profits through safe investments may choose to invest in these assets. Additionally, these G-secs can be resold on the secondary market, letting investors convert their holdings into cash in times of emergency.

Bidding

The Reserve Bank of India (RBI) auctions Treasury bills every week via non-competitive bidding, allowing retail investors and small-scale investors to participate without having to quote the yield rate or price. It enhances the exposure of new investors to the market for government securities, hence increasing the capital market’s cash flows.

Disadvantages of Treasury Bills

Low Return:

Treasury bills are government-backed debt securities, hence they have lower returns than other stock market investment instruments. Treasury bills are zero-coupon bonds, meaning that investors receive no interest on them. They are presented at face value after being issued at a discount. Because of this, regardless of the nation’s economic situation, investors in T-bills continue to earn the same returns throughout the bond’s term. It contrasts with the stock market, where changes in the market have a significant impact on the returns produced by both equity and debt instruments. As a result, in the event of a stock market upswing, linked tools’ yield rates are significantly larger than capital gains through G-Sec investments.

Taxation:

These bills are subject to short-term capital gain (STCG) tax at rates based on the investor’s income tax bracket. However, a key benefit of such G-Securities is that retail investors are not required to pay any tax deducted at source (TDS) upon redemption of these bonds, which eliminates the need to claim the money back through income tax returns if one does not fall into the tax bracket.

Who Should Invest in Treasury Bills?

The government treasury bills are a great investment vehicle for those seeking to lodge surplus assets in a secure investment vehicle that offers large returns. The RBI facilitates a non-competitive bidding process for these bonds, allowing individual investors to participate by submitting bids with the primary dealer of a scheduled commercial bank. Moreover, because the discount rate and par value are disclosed upfront, the investment process is completely transparent. It also facilitates the process of financial planning for the accumulation of substantial wealth.

Treasury bills are therefore one of the safest types of investment available in India. It is popular for portfolio diversification in the case of experienced investors who dedicate a percentage of their funds to government securities in order to reduce their portfolio’s total risk. These sovereign bills serve a vital function in managing the entire money supply in an economy, which in turn affects the capital market.

How many Treasury Bills have RBI recently sold?

According to data issued by the RBI on 3 August 2022, the 91-day T-bill had an announced issue amount of Rs 9,000 crore and 115 bids totalling Rs 32,740.21 crore were received. This 91-day T-weighted bill’s average price/yield was 5.4898 per cent.

For the 182-day T-bill, the notified value was Rs 7,000 crore, and 123 bids totalling Rs 26,478.80 crore were received. This 182-day T-weighted bill’s average price/yield was 5.8765 per cent. The notified amount for the 364-day T-bill was Rs 5,000 crore, and 170 bids totalling Rs 28,259.40 crore were received. The weighted average price/yield for these 364-day Treasury bills was 6.214%.

Final Take

In India, there are numerous forms of government-issued securities from which an investor may construct a portfolio. In addition, these securities will give a fixed or guaranteed income to help investors match their portfolio’s risk factors. Buying government securities can be a terrific method to improve one’s portfolio and investment strategy.

FAQs

What is an expense ratio?

The expense ratio, also called the annual fund operating expenses, shows how much it costs per unit to run a fund. Simply put, it is a ratio of the fund’s total expenses and its asset under management.

How safe are treasury bills?

T-bills are issued by RBI and backed by the Indian government. Therefore, they are virtually risk-free.

How to invest in treasury bills?

By opening a “Retail Direct Scheme Account” with the Reserve Bank of India, individual investors in India can purchase Treasury bills (RBI). In addition, retail investors can purchase T-bills on the stock exchange and other primary and secondary markets

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