Are you heavily stashing your money into short-term fixed deposits? Perhaps it’s a good moment to reconsider your investment strategy. This useful guide explores Treasury Bills (T-Bills) as a compelling alternative for safeguarding your capital and earning higher returns compared to conventional fixed deposits, all backed by the security of the Government of India.
The Context
We’ve all heard about Fixed Deposits, right? They are India’s go-to choice for saving, deeply rooted in our minds as a reliable saving instrument for generations. With the ease of booking FDs online, many individuals rush to open a fixed deposit as soon as they find themselves with extra cash in their bank accounts.
While it’s prudent to keep some emergency funds in FDs for swift retrieval and liquidity, stashing excess cash there can expose you to higher risks and limit your hard-earned money’s earning potential.
When we talk about risks, consider that each depositor in a bank is insured up to a maximum of ₹5,00,000 (Rupees Five Lakhs) for both principal and interest, which is a modest amount in case of a bank failure. Moreover, money in a savings account typically earns a mere 3%-3.5% interest, whereas 6 to 12-month fixed deposits offer average pre-tax interest rates ranging from 5.5% to 6.5%.
It’s clear that to grow your money, you have to invest it wisely, as inflation can gradually diminish its purchasing ability. If you’re not familiar with the concept of inflation, you’re encouraged to explore our article on the subject by clicking here.
What if there are alternative options in the market that can offer better returns than an FD, along with some benefits you might not have considered?
Enter Treasury Bills (T-Bills), an instrument dominating this space that many of our readers may not have explored. This guide will help you become familiar with T-Bills and provide strategies to safely maximize your returns.
What is a Treasury Bill or T-bill?
Treasury bills, issued by the Government of India, are a type of promissory note ensuring repayment of borrowed money at a future date.
Governments issue Treasury Bills (T-Bills) to borrow money from the public. It’s like the government asking people to lend them cash for a short period, and in return, the government pays back the borrowed amount with a bit of extra money, which is the interest.
Funds collected through such tools are typically used to meet short-term requirements of the government and, hence, to reduce the overall fiscal deficit of a country.
T-Bills help the government to manage its finances and fund various projects without resorting to long-term loans. As you’re essentially lending money to the government, investing in these instruments is considered virtually risk-free, as the government seldom fails to uphold its promises in this regard.
Investment Duration of Treasury Bills (T-Bills)
The duration of these instruments typically ranges from 14, 91, 182, or 364 days. Investors keep their money invested for this period and get back more than they put in because of the discount.
T-Bills are like short-term loans that the government takes from the public. They’re sold at a lower price (discount) and paid back at their full value (par) after a specific time.
While investors wait, the government uses the money for short-term needs like projects, daily expenses, or managing temporary budget gaps. It’s a way for people to lend money to the government for a short time and earn a little extra in return.
Earning Money with Treasury Bills (T-Bills)
Let’s say the government issues an 182-day (6-month) Treasury Bill with a face value of ₹1,000 and an interest rate of 2%. Investors who buy this T-Bill are essentially lending ₹1,000 to the government.
Purchase
You buy the T-Bill at an auction for, let’s say, ₹980. This is less than the face value, creating a discount.
Holding Period
The T-Bill matures in 182 days (6 months).
Repayment
After 182 days, the government repays you the face value of ₹1,000. The investor earns ₹20 (2% of ₹1,000) in interest.
So, you effectively lent ₹980 to the government and received ₹1,000 after about 6 months, making a ₹20 profit. The difference between the purchase price and the face value represents the interest earned on the T-Bill.
In this example, even though the returns might seem small when you look at them yearly, they often end up being higher than what you’d get from a fixed deposit.
Auction Process for T-Bills
The Reserve Bank of India (RBI) offers Treasury Bills on behalf of the Indian Government through a process called an auction. It’s not like an art auction; it’s a simple invitation for bids on specific days. If your bid is accepted, the T-Bills are issued to your Demat account, similar to how shares are issued in an IPO.
Just to remember, 14-day and 91-day T-Bills are auctioned every week on Fridays, while 182-day and 364-day T-Bills are auctioned every other week on Wednesdays.
Purchasing Treasury Bills
The Indian government introduced Treasury Bills (T-Bills) in 1917, and until two years ago, these were mainly bought by big institutions. Now, they are open to regular people too, making it fair for everyone. You can buy T-Bills on the RBI’s platform for retail investors called ‘RBI Retail Direct.’ Just open an account, complete your KYC details, and start investing.
Making it even easier, you can find T-Bills on Demat platforms like Zerodha and Groww where you must already be KYC compliant. Check the ongoing auctions on Fridays for 14-day and 91-day T-Bills and every two weeks on Wednesdays for 182-day and 364-day T-Bills. Bidding is as simple as buying a stock – just a swipe of a button.
Upon maturity of T-bills, the government automatically debits them from your demat account, termed as extinguishment of securities. The credited amount is transferred to your primary bank account linked with your demat within 15 days. Additionally, you’ll receive an SMS notification from CDSL on your registered mobile number when the T-bills mature.
Benefits of T-Bills Compared to Fixed Deposits
Better Returns
For Fixed Deposits lasting less than a year, Treasury Bills outperform in various aspects. The yield on T-Bills typically varies from 6.90% for ultra-short durations to as high as 7.5% for relatively longer periods. It’s important to note that the yield represents an annual return, so for short-term T-Bills, you’ll need to reinvest in subsequent auctions to accumulate 365 invested days and effectively realize the displayed yield.
Deferred Taxation
When you have a Fixed Deposit (FD), the tax on the interest you earn gets taken out (TDS) when the interest is credited to your account. If you renew your short-term FD, you’re essentially adding the interest (already taxed) back into your principal.
On the other hand, with Treasury Bills (T-Bills), tax isn’t taken out initially. This means your full yield and capital work together for better compounding. Taxation applies annually based on your tax bracket on the total T-Bill returns.
Safety of Capital
T-Bills have government backing without any upper limit, unlike private bank insurance capped at ₹5 lakhs. Their low-risk nature comes from being virtually default-free.
There is however still a slight risk associated with interest rate fluctuations, which can impact the market value of T-Bills only if they’re sold in the secondary market before maturity.
Conclusion
The money market is an interesting place, even more so than the stock market, for financial transactions. However, many regular investors might not know much about it. While safe investments like Fixed Deposits help with basic money management, exploring other safe options adds excitement to your financial journey.
We hope this detailed guide on T-Bills encourages you to consider lending money directly to the government for better returns than Fixed Deposits on your short-term investments.
Thanks for reading, and we hope to see you around!
Frequently Asked Questions (FAQs)
1. Why consider Treasury Bills (T-Bills) over Fixed Deposits?
T-Bills offer higher returns than Fixed Deposits, backed by the Government of India. They provide a safe alternative for maximizing returns on short-term investments.
2. How do Treasury Bills (T-Bills) work as a risk-free investment?
T-bills, issued by the government, are virtually risk-free. The government borrows money for a short period, promising repayment with interest. The low-risk nature stems from the government’s consistent fulfillment of these promises.
3. What is the investment duration of Treasury Bills (T-Bills)?
T-Bills have durations of 14, 91, 182, or 364 days. Investors lend money to the government for this period, receiving the full value of the investment at maturity, along with earned interest.
4. How can investors buy Treasury Bills (T-Bills)?
Investors can buy T-Bills through RBI Retail Direct or on Demat platforms like Zerodha and Groww. The Reserve Bank of India auctions T-Bills on specific days, and successful bids are credited to the investor’s Demat account.
5. What are the benefits of T-Bills compared to Fixed Deposits?
T-bills offer better returns, deferred taxation, and safety of capital. The yields on T-Bills are competitive, taxation occurs annually based on returns, and government backing ensures a virtually default-free, secure investment.
