Treasury bills: Use SIP to smooth rate volatility, invest steadily

Investors with regular income, short-term goals, and a strong need for capital preservation may go for T-Bills

The Reserve Bank of India (RBI) has introduced the systematic investment plan (SIP) feature for investing in treasury bills (T-Bills) via its Retail Direct platform. Retail investors must understand the suitability of this instrument for their financial goals before venturing into them.

 

Understanding T-Bills 

T-Bills are short-term government borrowing instruments issued by the RBI. “T-Bills have tenures like 91, 182, and 364 days. Dated government securities (G-Secs) are issued by the RBI for longer-term borrowing, with tenures ranging from one year to 50 years,” says Udbhav Shah, proprietor, DravyaSiddhi, an Association of Mutual Funds in India (Amfi)-registered mutual fund and strategic investment fund (SIF) distributor.

 

They are zero-coupon instruments. “They are sold at a discount to their face value, and the face value (₹100) is paid upon maturity,” says Shah.

 

Why invest in them? 

These instruments offer fixed returns. Being government-backed, they carry no default risk. “Their short tenures mean that interest rate movements have a lower impact on their prices,” says Suresh Darak, founder, Bondbazaar. He adds that T-Bill yields, at 5–5.5 per cent, are higher than those offered by current and savings accounts.

 

Risks involved 

Liquidity and reinvestment risks are the key concerns for investors. “Exiting before maturity is often difficult. Investors may face challenges in finding buyers and be forced to sell at unfavourable prices,” says Raghvendra Nath, managing director, Ladderup Asset Managers.

 

Investors also face reinvestment risk in a falling-rate environment. “This is the risk of being forced to invest at a lower rate upon maturity,” says Shah.

 

How SIP helps 

Retail investors can now automate T-Bill purchases using the auto-bidding facility. “T-Bill auctions happen weekly, every Wednesday. The minimum lot size is ₹10,000. One can invest in multiples of ₹10,000 thereafter. Investors can decide the period of reinvestment,” says Darak.

 

This facility improves access. “SIP brings the discipline of regular investing and can enable retail investors to gradually build a T-Bill corpus,” says Vijay Kuppa, director, Bidd.

 

SIPs also mitigate reinvestment risk. “An SIP structure will average out interest rate movements,” says Kuppa.

 

Investor suitability 

SIP in T-Bills suits investors with a regular income stream looking to park funds in safe, short-term instruments. “Investors with short-term goals, where security and capital preservation are important, may consider them,” says Ajay Kumar Yadav, chief executive officer and chief investment officer, Wise Finserv.

 

“Young earners looking to park excess monthly savings in low-risk instruments, first-time fixed income investors who do not want to lock in funds for several years, and retirees or conservative investors who wish to avoid market-linked risks may consider them,” says Kuppa. 

 

T-Bills can help defer taxation until withdrawal (unlike bank interest, which is taxed annually). They can also enable investors to generate regular cash flows. “By purchasing T-Bills with staggered maturity dates, investors can receive fixed cash inflows at predetermined intervals for managing near-term financial needs,” says Nath.

 

T-Bills are not ideal for long-term wealth creation. “Those who need instant liquidity, or lack the regular cash flow required for SIPs, should stay away,” says Kuppa.

 

Yadav points out that those seeking regular interest income, as offered by fixed deposits or bonds, may also find T-Bills unsuitable.

 

Alternatives and tax impact 

Investors who desire liquidity should access T-Bills via the mutual fund route. “Mutual funds offer higher liquidity and easier exit options,” says Feroze Azeez, joint chief executive officer, Anand Rathi Wealth.

 

Investors should also take note of the taxation of these instruments. “Returns are fully taxable at slab rates, regardless of the holding period,” says Azeez.

 

Mistakes to avoid 

Investors sometimes fail to align T-Bill investments with their liquidity needs, leading to premature exits at unfavourable prices

 

The difference between face value and purchase price—not the entire ₹100—is the return

 

Not factoring in that yields can fluctuate from one week to another

 

Tendency to treat T-Bills as long-term wealth-building instruments, whereas they are better suited for short-term goals and capital preservation