A Guide To Investing In Indian Treasury Bills

Treasury bills are short-term debt instruments issued by the Reserve Bank of India (RBI) on behalf of the Government of India. They are a popular investment option for those seeking stability and attractive returns. With maturities ranging from a few days to 364 days, treasury bills are a reliable choice for investors with short-term investment goals. In this article, we will discuss how individuals can invest in treasury bills in India, the different types of treasury bills available, and the advantages and limitations of investing in these securities.

Where to buy treasury bills

Treasury bills are short-term debt instruments issued by the Reserve Bank of India (RBI) on behalf of the Government of India. They are typically available with tenures of 91 days, 182 days, or 364 days.

Treasury bills can be purchased through the following avenues:

• RBI Retail Direct Platform: The RBI launched the 'RBI Retail Direct' platform in 2021 to facilitate retail investors' purchases of various government securities, including treasury bills. Individuals can open an account on this platform, complete their KYC, and provide their bank details to start investing. The platform offers a convenient way to participate in the weekly or fortnightly treasury bills auctions.
• Reserve Bank of India Auctions: The RBI conducts auctions at regular intervals, where investors can submit bids for treasury bills. These auctions are typically held weekly, starting on Friday night and ending on Tuesday night. Investors can open an online Retail Direct Gift Account (RDG) with the RBI, linked to their savings account, to participate in these auctions.
• Primary and Secondary Markets: Treasury bills, as well as other government securities, can be bought and sold on the stock exchange, i.e., the primary and secondary markets. Investors need to open a Demat account through a broker or a bank to trade in these markets.
• Depository Participant Commercial Banks and Registered Primary Dealers: Treasury bills can also be procured through depository participant commercial banks or other registered primary dealers (PDs). The security transfer for these transactions follows a T+1 settlement process.
• Open-Ended Mutual Funds: Some open-ended mutual fund schemes include treasury bills in their corpus, providing individuals with another avenue to invest in these instruments indirectly.

It is important to note that the minimum investment amount for treasury bills is specified by the RBI as Rs. 25,000, with any higher investments needing to be made in multiples of Rs. 25,000.

How to calculate returns

Treasury bills, or T-bills, are short-term government debt securities with a maturity of less than one year. Unlike many other debt securities that make regular interest payments to investors, T-bills yield no interest. Instead, they are sold at a discount to their redemption price. For example, a T-bill with a face value of $1,000 might sell for $985.

To calculate the return on a T-bill, you need to compare its par value to its face value. Since investment returns are most useful when expressed on an annual basis, you will also need to use the maturity period to convert the return to an annual percentage.

• Gather the necessary information: You will need to know the T-bill's purchase price, date of purchase, and maturity date.
• Determine the number of days until maturity: This will allow you to annualize the return.
• Calculate the yield during the maturity period: Subtract the T-bill's price from 100 and divide this amount by the price.
• Convert the yield to a percentage: Multiply the result from step 3 by 100.
• Calculate the annualized investment return: Multiply the yield by 365 and then divide by the number of days in the maturity period.

For example, let's say you buy a 13-week T-bill (91 days to maturity) at a price of 99.0. To calculate the yield during the maturity period, you would subtract 99.0 from 100 and then divide by 99.0, resulting in a yield of 0.0101. To convert this to a percentage, you would multiply by 100, resulting in a yield of 1.01%. To calculate the annualized investment return, you would multiply the yield by 365 and then divide by 91, resulting in an annualized return of approximately 4.12%.

In India, the Reserve Bank of India (RBI) issues T-bills as a part of its monetary policy to regulate inflation and spending/borrowing habits. T-bills can be procured by individuals at a discount to the face value and are redeemed at the nominal value, allowing investors to profit from the difference. For example, a 91-day T-bill with a face value of Rs. 120 can be purchased at a discounted price of Rs. 118.40. Upon maturity, individuals will receive the full face value of Rs. 120, resulting in a profit of Rs. 1.60.

Treasury bill types

Treasury bills are short-term debt instruments issued by the Reserve Bank of India (RBI) on behalf of the Government of India. They are used to meet the government's short-term funding requirements and are available in the following types based on their tenure:

14-Day Treasury Bill

This type of treasury bill has the shortest tenure of 14 days. It is issued at a discount to the published nominal value of the government security.

91-Day Treasury Bill

The 91-day treasury bill is one of the most common types, with a maturity period of 91 days. It is issued at a discount, and upon maturity, the investor receives the face value, which represents the interest earned. For example, an individual can purchase a 91-day treasury bill with a face value of Rs. 120 at a discounted price of Rs. 118.40. At maturity, they will receive the full face value of Rs. 120, resulting in a profit of Rs. 1.60.

182-Day Treasury Bill

The 182-day treasury bill has a maturity period of 182 days. Similar to the 91-day bill, it is issued at a discount, and the investor receives the face value as the return upon maturity.

364-Day Treasury Bill

The 364-day treasury bill has the longest maturity period among the types, lasting for an entire year, except for one day. Similar to the other types, they are issued at a discount, and investors receive the face value and interest upon maturity.

How to open an account

To open an account to invest in treasury bills in India, you can follow these steps:

Firstly, you need to be aware of the different types of treasury bills available. In India, the government issues three types of treasury bills with varying maturity periods: 91-day, 182-day, and 364-day treasury bills. These bills are typically issued at a discount to their face value, and investors receive the full face value upon maturity as profit.

To purchase treasury bills, you have a few options:

• Setting up a ""Retail Direct Scheme Account" with the Reserve Bank of India (RBI). This account can be linked to your savings account to enable transactions. Treasury bills can be purchased through auctions conducted by the RBI at regular intervals.
• Opening a Demat account through a broker or bank to buy government securities, including treasury bills, through the stock exchange (Primary and Secondary Markets).
• Investing through open-ended mutual fund schemes that include treasury bills in their corpus.

When opening an account, you will need to complete the Know Your Customer (KYC) process and provide your bank details.

It is important to note that the RBI has specified a minimum investment amount of Rs. 25,000 for individuals interested in procuring treasury bills. Any higher investment amount must be made in multiples of Rs. 25,000.

Additionally, the RBI Retail Direct platform, launched in 2021, allows retail investors to open an account and buy different government securities, including treasury bills. The bidding process for treasury bills usually happens weekly or fortnightly, starting on Friday night and ending on Tuesday night.

By following these steps and choosing the account option that best suits your needs, you can open an account to start investing in treasury bills in India.

Advantages and disadvantages

Advantages of investing in Indian treasury bills:

Treasury bills are considered one of the safest forms of investment in India. They are money market instruments issued by the Government of India as promissory notes with guaranteed repayment at maturity. Here are some advantages of investing in Indian treasury bills:

• Safety and security: Treasury bills are backed by the full faith and credit of the Indian government. The government is obligated by law to repay the principal amount along with interest, and since it can print its own money, there is virtually no risk of default.
• Low transaction costs: There are no transaction fees or commissions charged when purchasing treasury bills directly from the Reserve Bank of India (RBI) through their auctions.
• Liquidity: Treasury bills are highly liquid investments. They can be easily converted to cash, even before maturity, by selling them in the secondary market. However, selling before maturity may result in a discounted price.
• Guaranteed returns: Treasury bills offer guaranteed returns in the form of interest payments. While the returns may be lower compared to other investments, they are relatively stable and not influenced by market fluctuations.
• Short-term investment option: Treasury bills have a maximum tenure of 364 days, making them suitable for investors looking for short-term investment opportunities.
• No Tax Deducted at Source (TDS): Retail investors are not required to pay TDS upon redemption of treasury bills, making it a tax-efficient investment option for those who do not fall under the taxable income bracket.

Disadvantages of investing in Indian treasury bills:

While investing in Indian treasury bills offers several advantages, there are also some drawbacks to consider:

• Lower returns: Treasury bills typically offer lower returns compared to standard stock market investments. The fixed interest rates on treasury bills may be unattractive to investors seeking higher returns, especially during periods of high market performance.
• Reinvestment risk: Treasury bills mature quickly, and investors need to constantly reinvest their principal and interest into new treasury bills. This can be disadvantageous if interest rates drop, resulting in lower returns on reinvestment.
• Tax implications: The interest earned on treasury bills is subject to federal income tax. While it is exempt from state and local income taxes, investors still need to consider the impact of federal taxes on their overall returns.
• Limited flexibility: Treasury bills may not be suitable for investors who need quick access to their money. Early redemption of treasury bills may incur penalties, and selling them in the secondary market through a broker may attract fees.

Frequently asked questions