Every mutual fund house prioritises increasing returns and risk management in their daily activity. They implement several tools to get effective results in these elements. One of these tools is TREPS, which stands for Treasury Bills Repurchase. TREPS in mutual funds is beneficial for boosting portfolio performance.
Read this blog to understand the concept what is TREPS in mutual funds and the benefits and challenges of investing in them.
Understanding TREPS in Mutual Fund
Treasury Bills Repurchase or TREPS is a money market instrument that provides a short-term borrowing and lending agreement between the lender and the borrower. A borrower is an institutional investor, which is a mutual fund in this case. They pledge treasury bills with lenders for borrowing funds, such as financial institutions.
In return for the funds provided by banks, a mutual fund repurchases the pledged securities after a predetermined time and at a particular price. Mutual funds can get higher yields while participating in TREPS as it improves their Net Asset Value (NAV).
Why do Mutual Funds Invest in TREPS?
TREPS investment in mutual funds enhances the diversification of the investment portfolio. Here are the following reasons for which mutual funds invest in TREPS:
- Enhancing Safety: Investing in TREPS involves government-issued securities. This promotes enhanced security for the investments of mutual funds. The involvement of three parties including the mutual fund, the financial institution, and the government ensures transparency and risk mitigation.
- Short-term Returns: Since idle cash in a mutual fund portfolio may be insufficient for overall returns, mutual funds should invest in TREPS. Mutual fund houses can invest that cash and get a short-term return on that cash. This can enhance the performance of the investment portfolio without any risks.
- Liquidity Management: Investments in TREPS can also help with liquidity management. TREPS provides a quick liquidity option without sacrificing returns. This makes TREPS a primary choice for mutual funds that seek short-term replacement of their idle cash.
- Regulatory Compliance: As per the regulation of the Securities and Exchange Board of India (SEBI), mutual fund schemes must allocate a minimum of 5% of liquid assets in the portfolio. TREPS allows mutual funds to meet these requirements and provide a safer investment option.
- Diversification of Portfolio: Mutual funds invest in TREPS to diversify their portfolio. This can reduce the volatility of the overall portfolio and the market fluctuations.
- Short-term Liquidity Requirements: Mutual funds can invest in TREPS if they need any sudden liquidity requirement, like an urgency to raise money.
Benefits of Investing in TREPS
- Low Risk: TREPS (Tri-Party Repo) are considered very safe as they are backed by collateral, usually government securities, reducing the risk of default.
- High Liquidity: TREPS offer excellent liquidity, allowing investors to park surplus funds for very short durations and access their money quickly when needed.
- Stable Returns: Returns from TREPS are predictable and not affected by stock market volatility, making them ideal for conservative investors seeking steady income.
- Diversification: Including TREPS in your portfolio helps diversify risk and adds stability, especially during periods of market uncertainty.
- No TDS Deducted: Income from TREPS is not subject to Tax Deducted at Source (TDS), simplifying tax management for investors.
- Flexible Investment: TREPS can be bought and sold in the secondary market, offering flexibility to adjust investments as per changing needs.
- Regulated by RBI: TREPS are regulated by the Reserve Bank of India, ensuring transparency and investor protection.
- Ideal for Short-Term Parking: They are best suited for parking short-term surplus funds while earning better returns than a regular savings account
Advantages of Investing in TREPS
It is extremely beneficial for mutual funds to invest in TREPS. Have a look at the advantages of investing in TREPS:
- Safety from the Government: Since TREPS are government-issued securities, mutual funds can purchase them without having a fear of default. This also increases the investors’ confidence regarding the security of their funds.
- Regulatory Compliance: SEBI has directed mutual funds to include TREPS in liquid assets. TREPS in mutual funds also helps to encourage investors that their investments are complied with the regulatory standards.
- Attractive Returns as Per Market Conditions: Based on the market conditions, mutual funds can provide attractive returns to investors by investing in TREPS. They are beneficial with high interest rates, allowing investors to get more returns on behalf of their idle cash.
- Portfolio Diversification: Investing in TREPS allows mutual funds to diversify their portfolios since this provides a liquidity option. This type of diversification lowers the overall risk and provides stable returns amid market fluctuations.
- Short-Term Profit with Quick Liquidity: TREPS mutual fund is highly accessible in the money market since it offers quick liquidity. This quick liquidity can be useful to hold cash temporarily which facilitates easy buying and selling.
Challenges of Investing in TREPS
Besides having numerous benefits, investing in TREPS can pose certain risks to mutual funds. Here are the challenges of investing in TREPS:
- Restricted Returns: Sometimes TREPS investments may restrict the potential returns of a mutual fund based on tenures and size. Due to the lower potential of returns, the less expectation among investors can reduce the price of a mutual fund.
- Dependency on the Market: The entire attractiveness of TREPS is dependent on the market scenario and liquidity conditions.
- Complexities in Operations: TREPS transactions involve more than one party. This increases operational complexities as well as expenses.
How Mutual Fund Returns are Affected by TREPS?
The TREPS may affect the returns of mutual funds. They can impact the share prices of funds indirectly through various mechanisms since they include borrowing and lending funds with collateralised securities.
If the interest rates offered by the TREPS are more than the current market rates, investors would like to invest in TREPS instead of the stock market. This can reduce the demand for shares and decrease in share prices.
On the other hand, high amounts of borrowings through TREPS can lessen the supply of shares in the market. The reduced supply can increase the pressure on share prices because of the increased demand for shares. All of these could impact the mutual funds’ returns.
TREPS vs Different Money Market Instruments
The below section highlights the difference between TERPS and different money market instruments:
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Treasury Bills Repurchase
TREPS offers a short-term borrowing and lending agreement for financial institutions and institutional investors. Institutional investors pledge treasury bills with financial institutions to borrow funds.
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Deposit Certificates
Certificate of Deposits is used to lend important financial resources to an organisation. The operating procedure is the same as a fixed deposit except for the higher negotiating capacity.
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Commercial Paper
A commercial paper acts as a promissory note created by an organisation to raise short-term funds. Only reputed large-cap companies can use this paper because it is unsecured. These debt instruments mature anytime between seven days and one year.
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Banker’s Acceptance
The Banker’s acceptance is one of the most essential money market instruments that is traded in the financial industry. It is a loan extended to the bank, including a guarantee of repayment in the future.
Final Thought
TREPS in mutual funds is useful to boost investor confidence as it complies with the regulations of the SEBI. It also ensures a quick liquidity option without hampering potential returns. Investing in TREPS can reduce the volatility of a mutual fund’s portfolio and market fluctuations.
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