5 reasons why treasury bills are a great investment tool for retail investors

Pranati Deva
Updated: 13 Dec 2021, 05:08 PM IST
TL;DR.

Treasury bills are risk-free money market instruments for any investor looking for a safe short-term investment option. Let’s take a look at its advantages and learn how to buy a T-bill.

Treasury bills are risk-free money market instruments for any investor looking for a safe short-term investment option. 

Treasury bills are risk-free money market instruments for any investor looking for a safe short-term investment option. 

Treasury bills or T-bills are short-term borrowing tools that are issued by the Indian Government for a maximum tenure of 364 days. These are money market instruments that are zero-coupon securities and thus pay no interest.

Currently, these are issued at 3 tenure - 91-day, 182-day and 364-day.

So how do investors make money? T-bills are issued at a discount to their face value but redeemed at their original value at maturity. Suppose you buy a 91-day T bill with a face value of 150 and it is given to you at a discounted 145. However, when you redeem the T-bill after 91 days, you will be paid the original amount which was 150, and hence you make a profit of 5. There is no risk of you receiving below the 145 you invested.

Also, since these are government-backed, they are virtually risk-free investments and can be used to park any surplus cash you have.

Understanding T-bills a bit better

Whenever we need a loan, we go to a bank and apply for one. Similarly, when the government needs a loan to finish say infra projects or for defense equipment etc, it goes to the RBI. The RBI then auctions this loan in the form of T-bills that we can purchase easily.

So basically, by buying a T-bill, you are lending the government a part of the loan it requires and the government pays it back at the end of the tenure.

A T-bill helps the government raise funds to meet immediate requirements.

Features:

1) A minimum investment for a T-bill is 10,000 or in multiples of the minimum amounts like 20,000, 30,000, 40,000.

2) No interest is provided on the total investment. The investor buys it at a discounted rate and receives the original face value at maturity.

3) There is no risk involved. Even during a crisis or a weak economic period, the government returns the complete amount to the investors. If, say you buy T-bills worth 10,000, there is no chance of you receiving less than that amount despite the market or economic conditions.

4) While the maturity period does not change in a T-bill, the discount rate varies at different intervals.

5) It can also be sold in the secondary market and converted to cash in case of emergencies.

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Understanding Treasury bills

Who should buy a T-bill

It is advisable for any investor looking to park surplus cash in a risk-free investment for the short term. It is a good Instrument for any investor looking to diversify.

How to buy a T-bill

T-bills are issued every week by the RBI and an investor must have a Demat account to buy them. You can also find it on most online brokerages and easily invest. RBI opens a non-competitive bidding window every week. You can place your bid, complete payment and receive your T-bills directly in your bank account.

Upon maturity, the amount of its face value gets paid directly to your bank account that has been linked to your Demat.

T-bills are not only a very safe and risk-free instrument of investment, it is also a great tool for diversification. The stability of T-bills can easily help you cushion any blows from stock market volatility.

First Published: 13 Dec 2021, 05:08 PM IST
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