Treasury Bills - An Effective Cash Management Product

Treasury Bills are very useful instruments to deploy short term surpluses depending upon the availability and requirement. Even funds which are kept in current accounts can be deployed in treasury bills to maximise returns Banks do not pay any interest on fixed deposits of less than 15 days,or balances maintained in current accounts, whereas treasury bills can be purchased for any number of days depending on the requirements. This helps in deployment of idle funds for very short periods as well. Further, since every week there is a treasury bills auction, one can purchase treasury bills of different maturities as per requirements so as to match with the respective outflow of funds. At times when the liquidity in the economy is tight, the returns on treasury bills are much higher as compared to bank deposits even for longer term. Besides, better yields and availability for very short tenors, another important advantage of treasury bills over bank deposits is that the surplus cash can be invested depending upon the staggered requirements.

Example :
Suppose party A has a surplus cash of Rs 200 crore to be deployed in a project. However, it does not require the funds at one go but requires them at different points of time as detailed below:

     - Funds Available as on 1.1.2000 Rs. 200 crore

     - Deployment in a project Rs. 200 crore

As per the requirements

6.1.2000  Rs. 50 crore
13.1.2000   Rs. 20 crore
02.2.2000   Rs. 30 crore
08.2.2000   Rs. 100 crore

Out of the above funds and the requirement schedule, the party has following two options for effective cash management of funds:

Option I

Invest the cash not required within 15 days in bank deposits
The party can invest a total of Rs 130 crore only, since the balance Rs 70 crores is required within the first 15 days. Assuming a rate of return of 6% paid on bank deposits for a period of 31 to 45 days, the interest earned by the company works out to Rs 76 lacs approximately.

Option II

Invest in Treasury Bills of various maturities depending on the funds requirements
The party can invest the entire Rs 200 crore in treasury bills as treasury bills of even less than 15 days maturity are also available. The return to the party by this deal works out to around Rs 125 lacs, assuming returns on Treasury Bills in the range of 8% to 9% for the above periods.

Portfolio Management Strategies
Strategies for managing a portfolio can broadly be classified as active or passive strategies.

Buy And Hold A buy and hold strategy can be described as a passive strategy since the Treasury bills once purchased, would be held till its maturity. The salient features of this strategy are:

Return is fixed or locked in at the time of investment itself.
The exposure to price variations due to secondary market fluctuations is eliminated.
There is no risk of default on maturity.

Buy And Trade
This strategy can also be described as an active market strategy. The returns on this strategy are higher than the buy and hold strategy as the yield can be optimised by actively trading the treasury bills in the secondary market before maturity.