Are Treasury Bills a good investment option? How to invest in Government Treasury Bills? Know more

Date : 07/03/2023
Read: 4 mins

Why Treasury Bills can be a good investment avenue

Looking for fixed-income avenues? Why limit yourselves to fixed deposits or Public Provident Funds (PPFs)? Other avenues, too, can prove lucrative for your portfolio. One such example is Treasury Bills.

What is a Treasury Bill?

A Treasury Bill is a form of short-term Government borrowing. Investors buying the bills provide the necessary funds to the government, for which they earn a return on their investment.

Features of Treasury Bills

Some of the salient features of Treasury Bills are as follows –

Treasury Bills are money market instruments with short-term maturity tenures.
No interest rate is paid on Treasury Bills. Instead, the government issues the Bills at a discount and then redeems them at their face value, thereby giving returns to investors.
The Reserve Bank of India auctions off the bills every Wednesday.
Yield calculation in Treasury Bills

Since Treasury Bills do not offer a rate of return, investors calculate the yield to assess whether these instruments are lucrative. The annual yield from the Bill can be calculated using the following formula –

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

In the formula, D represents the duration of the Bill, and P is the discounted value at which the Bill is sold.

Types of Treasury Bills

As mentioned earlier, there are different types of Treasury Bills depending on their duration. So, let’s have a look at these types –

Advantages of Treasury Bills

Liquid avenues
Treasury Bills are short-term investment avenues with low maturity periods. Thus, they can prove to be suitable investment options if you want to invest in the short term. Moreover, Treasury Bills can be traded on the secondary markets and easily converted to cash. Thus, they are highly liquid.
Risk-free returns
Since Treasury Bills are government security, they are not exposed to default risk. You can earn a guaranteed return on investment, and the value of the Bill is not exposed to market volatility.
Facilitates government’s monetary policy
The RBI issues Treasury Bills not only to provide funds to the government but also to manage inflation. If inflation rates rise, the RBI can issue more Treasury Bills to curb liquidity. The opposite is true in the case of a recession. Moreover, the government resorts to Treasury Bills to reduce its fiscal deficit.
Access through bidding
You can invest in Treasury Bills through non-competitive bidding in weekly auctions hosted by the RBI. You can, thus, get easy access to government securities.

Limitations of Treasury Bills

Lower returns
Treasury Bills do not offer very high returns on investment. The yield is usually lower than other fixed-income securities like fixed deposits, PPF, etc. Moreover, you might lose out on the potential returns that stocks can generate in a bullish market.

Returns are not inflation-adjusted
If the inflation rate is higher than the yield of the Treasury Bill, your overall return will be negative. Thus, Treasury Bills do not offer inflation-adjusted returns, which might hamper the real returns that investors can get.

Tax liability
The return earned from a Treasury Bill is subject to Short Term Capital Gains Tax (STCG). Thus, you incur a tax liability which reduces the effective yield.

Higher investment amount
Treasury Bills require at least Rs.25,000 in investment, while 14-day Bills require Rs.1 lakh. Such high investment amounts might not be suitable for all investors, especially those with limited disposable income.

Who can invest in Treasury Bills?

Every investor can invest in Treasury Bills through two different modes. Here’s how –

Through RBI
You can open a Direct Retail Gift Account with the RBI and participate in auctions to buy the Bills.

Through secondary markets
Treasury Bills are available for trading on the stock exchanges as well. So, if you have a Demat account, you can buy Treasury Bills through your broker.

The bottom line

So, if you want to invest in short-term fixed-income instruments with no default risk, Treasury Bills can be a suitable choice. They offer guaranteed returns and also portfolio diversification.