T-bills are safer and better than fixed deposits

Indians invest approximately 60 trillion every year. Of this, around 50% of household savings is invested in real estate and about 15% each in bank fixed deposits (FDs) and gold. Many investors prefer the safety and comfort of physical gold even though there are alternatives to this asset class in the form of gold funds and sovereign gold bonds. As for FDs, a far superior alternative, with better safety and security features, is government securities, particularly treasury bills (T- bills).

T- Bills are promissory notes issued by the Reserve Bank of India (RBI) almost every week on behalf of the government of India. These bills come with a maturity profile of 91 days, 182 days and 364 days. They offer market rates that are superior to FDs with similar maturity. For instance, the 3-month and 12-month T- Bills offer 6.7% interest against FD rates of 4.5- 6%.

T- Bills are risk free securities since they come with a government guarantee and are issued at a discount to the face value. On the day of maturity, these bills are debited automatically from your demat accounts. The amount corresponding to their face value is instantly credited into the bank account linked to your demat account.

Past data shows that T- Bills and most open market-issued debt securities offer higher returns than bank FDs with a similar maturity 70% of the time. Government bonds, another good investment option, are issued for longer durations of up to 30 years. The frequency of interest payments is semi-annually.

Investors should identify the time period for which they want to invest in fixed income products. The investment horizon can be anything between, say, 91 days and 30 years. The first step in this direction should be to check out the interest offered by banks on FDs. They should then compare market yields offered by similar maturity T-Bills and government bonds. Thereafter, they should invest in the option that offers higher returns.

One of the biggest advantages of FDs is easy liquidity despite the lower interest rates. However, it should be noted that, in case of an emergency, T- Bills and other government securities can be pledged to avail loans or sold out in the markets. However, easy liquidity in the case of certain higher duration bonds of beyond 10 years can be a challenge.

While the value of government securities can see a dip due to rise in interest rates in the economy, this is temporary and investors get the targeted returns if these are held till maturity.

There are reasons why market- linked debt instruments , such as T-Bills and other government securities, offer a higher rate of interest. For one, markets are very efficient in terms of price discovery of most assets. The interest rates of these instruments are thus determined by market forces, driven by demand and supply of liquidity in the system. Besides, banks needs to maintain liquidity ratio and cash reserves even as they focus on priority sector lending. Consequently, this liability of banks brings down the weighted average yields of its assets and impacts their ability to offer higher returns to FD holders.

Banks also have non-performing assets, the cost of which are ultimately borne by FD holders in the form of lower interest rates. Banks also needs to pay around 0.12% to the Deposit Insurance and Credit Guarantee Corporation for insurance of FDs up to 5 lakh. Government securities do not need to meet any such requirements.

Investors also need to take into account another disadvantage with bank deposits. Banks raise the interest rates for loans much earlier than for deposits in a a rising rate cycle and reduce deposit rates first in a falling interest rate scenario. While the RBI hiked repo rates six times in the last one year, banks lagged behind in raising FD rates. Market-linked instruments like T-Bills captured this much faster.

Vijay Mantri is co-founder and chief investment strategist at JRL Money.

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Updated: 23 Jul 2023, 09:37 PM IST

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