Treasury bills (T-bills) are among the most popular investment instruments in Ghana. But despite the high demand for them, a lot of people do not have a good idea of what they actually are.
In this article we look at providing investors with relevant information about what T-bills are, how the return on them is determined and the advantages and disadvantages of having them in your portfolio according to Economist & financial analyst, Jerome Kuseh.
What are T-bills?
Treasury bills are short-term loans that the government takes to finance various operations. In Ghana, the maturity of T-bills are 91-days and 182-days with each of them offering a different return. Because T-bills are guaranteed by government, it is considered a risk-free investment and therefore it is usually used as a benchmark for determining the value of any investment. If an investment offers you returns lower than a T-bill, then you probably would not want to invest in it.
Our expert, Jerome Kuseh, explained that T-bills are determined when the government issues T-bills through auctions. The auctions are not open to the general public. They are only available to primary dealers. These are financial institutions which are permitted by the Bank of Ghana (BoG) and licensed by the Securities and Exchange Commission (SEC) to buy government securities issued by the BoG.
How to buy T-bills
Most financial institutions offer T-bills to the general public with minimum purchases of about GH¢100 or GH¢200. You can choose to purchase it for 91 days or 182 days, with the 182-day version having a higher interest rate because of the longer maturity period. You will have the option to have your principal and interest deposited in your account at maturity; have the interest deposited in your account and the principal rolled over (re-invested in T-bills); or have the interest added to your principal and the total rolled over. Many financial institutions offer you the opportunity to redeem your investment before maturity. Be sure to ask about this before buying, in case you may need to withdraw money for an emergency.
Advantages of T-bills
- No risk of losing your investment (as long as the government does not collapse).
- It is liquid i.e. it is usually easy to redeem your investment whenever you need it.
- No fees. You are usually not charged investment fees when you buy T-bills.
- No taxes. Returns on your T-bills are not taxed in Ghana.
- Easy to buy. Your bank probably offers it.
- Low volatility. Treasury bill rates rise and fall less wildly than other investments e.g. stocks.
Disadvantages of T-bills
- Relatively low returns. It is risk-free so do not expect to earn exceptional returns on this.
- Returns are not fixed. Since the rates are determined by auctions, you could have your T-bill rolled over at a rate lower or higher than your initial purchase.
- It makes borrowing costs high for businesses. T-bill rates in Ghana are usually high and this draws banks to invest in them to the detriment of businesses looking for credit.