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What is TREPS?

Treasury Bills Repurchase (TREPS) is a short-term money market instrument that helps investors earn returns on their idle cash. Financial institutions, banks, and mutual funds use these.

One party sells treasury bills to another party with a promise to buy them back in the future at an agreed price. TREPS are safe investments since the underlying instruments are government-issued securities. TREPS offer high liquidity and guaranteed returns, thus making them an ideal investment for the short term.

What is TREPS in Mutual Funds?

The Securities Exchange Board of India (SEBI) mandates mutual funds to invest at least 5% of their assets in liquid instruments like TREPS. Mutual funds have been investing in TREPS to generate returns for their investors. Not only debt MFs but even equity MFs invest in TREPS to park their funds for the short term. Let’s understand why mutual funds invest in TREPS.


Why Do Mutual Funds Invest in TREPS?

Mutual funds choose to invest in TREPS for several reasons.

First, TREPS are considered a safe investment because they involve buying government-issued securities. This assures safety and security for the invested capital.

Secondly, TREPS offer quick access to cash, which is great for mutual funds looking to park their money temporarily.

Aside from safety and quick cash access, mutual funds also like TREPS because they provide better returns than short-term options like savings accounts or fixed deposits. The returns depend on the market conditions. TREPS can offer better returns when interest rates are high.

Lastly, as mentioned earlier, SEBI mandates mutual funds to invest at least 5% of their assets in easily convertible assets like TREPS.

Impact of TREPS on Mutual Fund NAV

The impact of investing in TREPS on a mutual fund’s net asset value (NAV) depends on things such as how much money is invested in TREPS, for how long, current market conditions, and the overall mix of the mutual fund’s investments.

Investing in TREPS can positively impact the fund’s NAV in several ways.

Firstly, investing in TREPS helps a mutual fund generate higher returns, ultimately increasing the fund’s net asset value.

Secondly, investing in TREPS can help reduce the overall portfolio’s risk. TREPS are safe and liquid instruments that help counter the risk of equities or corporate bonds. Thus, TREPS are good for stabilising the fund’s portfolio and reducing the impact of market movements on its NAV.

However, investing in TREPS can also negatively impact a fund’s NAV. A fund investing heavily in TREPS for longer durations can reduce the portfolio’s return potential. As a result, the mutual fund’s NAV may decline since the return potential may decrease.

Benefits of Investing in TREPS

The following are the benefits of investing in TREPS:

  • Safety: Investing in TREPS means buying government-issued securities that are known for being safe. This makes TREPS a secure investment, and you can feel confident about the safety of your money.
  • Liquidity: TREPS offer quick access to cash since you can buy and sell them easily in the money market. Thus, TREPS can be a suitable option if you want to invest your extra money temporarily.
  • Attractive Returns: The returns from TREPS depend on market conditions, so when interest rates are high, they offer higher returns.
  • Diversification: Investing in TREPS offers safety and liquidity to the investment portfolio. This helps spread out the risk and manage the overall portfolio volatility. TREPS investments make the investment portfolio less risky and more stable during market fluctuations.

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Frequently Asked Questions (FAQs)

What is the full form of TREPS?

TREPS stands for Treasury Bills Repurchase.

Is SIP safe with investments in TREPS?

Yes, TREPS are safe investments as the underlying asset is government security.

How does TREPS contribute to portfolio diversification?

TREPS are liquid and secure investments. Adding them to your portfolio will reduce the risk and offer stability. Thus, during market volatility, TREPS can balance the overall portfolio risk.