Understanding Treasury Bills (T-Bills): Safe, Short-Term Investments

Suppose you have invited people for a barbecue session in your backyard, and suddenly, you are out of charcoal or some other necessity. So, as a quick solution to this, you go ahead and borrow a few bucks from your neighbours. To this, you make a promise of repaying the loans next week. 

Treasury Bills (T-bills) are derivatives of this simple borrowing activity, where you borrow money with a promise to pay back the initial amount. Treasury bills are zero coupon securities and pay no interest. Instead, they are issued at a discount and redeemed at the face value at maturity. In the same manner, as you are the borrower in your barbecue scenario, governments borrow through T-bills to finance their short-term needs.

So in the above scenario barbecue borrowing is an informal process between friends, on the other hand, Treasury Bills are formal instruments of value in the financial market, providing the safety of a liquid investment. 

Let’s explore the world of Treasury bills more and try to get down to their essence.

What are Treasury Bills, and Why does the Government Need your money?

T bills are ZCBs (Zero coupon bonds) they are issued at a discount, with only the scale being significantly larger and the borrower being the government.

When the Government requires short-term funds to meet its expenditure,RBI floats T-bills on behalf of govt, which are obligations in the future to make a fixed payment to you. They are short-term financial instruments with a maturity not exceeding one year. Instead of borrowing from friends, the Government borrows from investors like you and us.

Governments, like households or businesses, often face fiscal deficits. There might be times when expenses exceed income, creating a temporary shortfall. Treasury bills are a quick and efficient way to address this.

Some of the few reasons why the Government might need the money are listed below:

• Short-term Funding: Treasury bills are used to meet the short-term revenue requirement of a government such as for salary payments on funding of infrastructural activities or the interest payment of bonds.

• Cash Management: From this standpoint, they assist governments in achieving cash flow balance and guarantee that the Government is always in a position to meet its cash needs.

In other words, treasury bills have more overriding functions of meeting the budget and short-term funds deficit needs of the Government.

Types of Treasury Bills

The three basic types of Treasury Bills, known as T-bills in India, are categorized based on the amount of time before you get your money back.

91-Day Treasury Bill

• This T-bill lasts for 91 days. 
• You lend your money for almost 3 months.
• 91-Day Treasury Bill can be bought in amounts of Rs. 25,000 or more. 

182-Day Treasury Bill

• This T-bill lasts for 182 days, which is about 6 months. 
• You lend your money for about half a year.
• 182-Day Treasury Bill can be bought in amounts of Rs. 25,000 or more. 

364-Day Treasury Bill

• This is the longest T-bill. 
• You lend your money for almost a year.
• 364-Day Treasury Bill can be bought in amounts of Rs. 25,000 or more.

All T-bills are sold at an auction. This means the RBI offers them for sale on behalf of the Government, and people can bid on them. The price you pay depends on the demand. 

Important: You can’t get back the money you invested back immediately. You have to wait until the Treasury bill matures or is eligible for resale. T-bills are issued at a discount than their face value and at the time of maturity the investor receives the full face value.

Benefits/Pros of Investing in Treasury Bills

There are several advantages to considering T-bills for your portfolio:

• Safe as Houses: Treasury bills are somewhat similar to placing your money in the RBI. This is good because they operate under the Indian government, and even if the economy is poor, you know your money is safe.
• High Liquidity: T-bills are easily bought and sold in the secondary market due to their high liquidity.
• Your Money Can Run Fast: Treasury bills are like short-term goals. They don’t stay locked up for too long. So, if you need your money quickly, treasury bills are perfect. Also, if you finds yourself in a position where you desperately need the money before the due date, you can always sell the bill to the next person. It is like having super fast piggy bank by your side all the time!

In other words, treasury bills are relatively safe, short-term investment which provide ready and easy access to your funds. That is like having a savings account with added security that it is supported by the Government.

Conclusion: T-bills A Right Fit for You?

Now that you have read this far then it should be quite clear what treasury bills are all about. They act as deposits or vaults for your money that is well secured by the Government.

These are not going to make you a millionaire overnight, but they’ll protect your money from losing value. It’s like you have a friend you can rely on to watch over your savings from being stolen.

However, one thing to keep in mind is that financial positions vary from one person to another. If one is interested in high returns or is likely to require the money for some time, then he or she may find a better investment out there. It is always wise to consult your financial advisor and find what suits you in the best way.

Please share your thoughts on this post by leaving a reply in the comments section. 

Also, check out our recent post on “All you need to know about Arbitrage funds!“

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Disclaimer – This article is for educational purposes only and by no means intends to substitute expert guidance. Mutual fund investments are subject to market risks. Please read all the scheme-related document carefully before investing.