Buying T-bills (Treasury Bills) and Government Bonds directly v/s Investing in Liquid & Overnight Funds

[kuskus1]

Since the past few days I was toying with the idea of parking my idle money, which I might need in 4 to 5 months, in overnight funds or liquid funds. These funds invest a part of it in Government Bonds and T-bills.

Instead of investing in those funds why not buy 91 day T-bills directly? On doing so I will be getting much better returns.

Is there any disadvantage in direct buying of T-bills? Will there be a lot of hassle when I have to redeem them after their maturity??

 

[budzybudz]

@kuskus1 "I might need in 4 to 5 months" - if you are sure of using the money in the next 4-5 months, then T-bills are a good option for you. You will also need to pay the required taxes.

Liquid/Overnight funds are an option if the need for money is uncertain. It also saves you from paying taxes. Only need to pay the taxes when you sell them.

 

[manal]

@budzybudz How does liquid fund save you from paying taxes?

 

[budzybudz]

@manal The interest gained from T-bills will be added to your income when it matures, and you will need to pay the required taxes on it according to your tax slab (STCG).

But the money on liquid funds and whatever the interest gains on it will be kept inside it. You do not have to pay taxes until you sell it. This deferred taxation allows uninterrupted compounding on the gains. Also, if you sell it only after 3 years the gains will be treated as LTCG and the benefit of indexation can be used - which means only the "real" gains on top of the inflation will be taxed. Since the liquid fund returns broadly match the inflation, the real gains and taxes on it will be negligible/nil after the indexation.

 

[matthewpegler]

@budzybudz This is a very important comment which need to be understood by all with respect to taxation on fixed income instruments

 

[anotherblowhard]

@budzybudz But this gain is only when we keep Liquid funds for three years, right? For that duration aren't other funds better?

 

[budzybudz]

@anotherblowhard As I told, liquid funds are a good option if the need for money is uncertain.

If you are sure that you will need the money after 3 years, then there could be better options depending on the case.

 

[ngocthanh2015]

@kuskus1 I moved to tbills for shortterm needs. I dont want to pay the TER for that funds. But u loose liquidity

 

[anotherblowhard]

@ngocthanh2015 I put a 91 day bill for 30k and I got back the 30k only. Am I checking something wrong?

 

[ngocthanh2015]

@anotherblowhard U probably got some amount back in 2-3 days after bond auction. So technically u didnt put 30k

 

[anotherblowhard]

@ngocthanh2015 Would there have been some intimation through mail/SMS?

 

[anotherblowhard]

@ngocthanh2015 Right, how do I check that?

 

[eyelovesjesus]

@anotherblowhard check your bank account statement linked to this tbill

 

[ngocthanh2015]

@anotherblowhard Where did u buy.

 

[anotherblowhard]

@ngocthanh2015 Coin, by Zerodha

 

[blaise]

@kuskus1 Hassle, and taxes. Those are the downsides

 

[rocketman101]

@blaise STCG tax of 15%?

 

[ngocthanh2015]

@rocketman101 Nope taxed at ur income slab if I am not wrong

 

[rocketman101]

@ngocthanh2015 So if I earn 100 as interest, this 100 would be included into my overall income for that year and the taxes are calculated, right?

 

[ngocthanh2015]

@rocketman101 Yup I guess. Very bad choise if u are in 30% slab