What is TREPS & Why Mutual Funds Invest in TREPS?

In the world of mutual funds, there is a financial instrument you might not be aware of: TREPS or Treasury Bills Repurchase. While it sounds complicated, TREPS is actually a very useful tool for mutual funds to manage their cash and enhance returns. You can think of TREPS as a smart way of deploying idle cash safely and efficiently. In this article, we will understand why mutual funds invest in TREPS and how it impacts their share price.

What Is TREPS In Mutual Fund?

Before we get into why mutual funds buy TREPS, let’s first understand what it means. TREPS or Treasury Bills Repurchase are short-term financial contracts used by mutual funds, banks and other investors to manage cash and liquidity.

In a TREPS transaction, one party (like a bank) sells government securities such as treasury bills to another party (like a mutual fund) with an agreement to buy it back later at a fixed price, usually involving a small interest component.

It’s a way for the seller to get cash fast and for the buyer (in this case a mutual fund) to earn some interest on its idle cash.

TREPS are low risk as they involve government-issued securities and are very short-term (overnight to a few days or weeks). They offer quick liquidity and good returns and are suitable for investors with a short-term horizon.

The regulatory guidelines by the Securities and Exchange Board of India (SEBI) mandate mutual funds to invest at least 5% of their assets in liquid assets like TREPS.

Why Mutual Funds Invest In TREPS

Mutual funds buy TREPS for a variety of reasons such as liquidity, safety, good returns and regulatory compliance.

TREPS involves government securities which are considered to be one of the safest investments. This assures mutual funds of their investment. Also, TREPS are highly liquid; so mutual funds can get cash whenever needed or to meet sudden redemption requirements. Therefore, TREPS is a quick and easy way for a mutual fund to raise money without selling underlying assets.

Apart from liquidity and safety, mutual funds also earn returns on their cash, that are higher than other short-term saving instruments like bank savings accounts or fixed deposits. Through TREPS mutual funds can make some money on the cash they have, instead of just keeping it idle which can boost the overall returns of the fund at virtually no risk or without disturbing the quality of the investment portfolio.

Lastly, regulatory compliance is another reason why mutual funds buy TREPS. Mutual funds are required to invest at least 5% of their assets in liquid assets like TREPS as per SEBI guidelines.

Impact on Mutual Fund's Share Price

When mutual funds buy TREPS it impacts their share price. The impact of a TREPS investment on a mutual fund’s share price is dependent on investment size, investment tenure, market conditions and portfolio mix.

Positive Impact

• Buying TREPS can generate higher returns for a mutual fund which can increase its net asset value (NAV). Investors are willing to pay a premium for a mutual fund with a higher NAV. As a result, the share price of the mutual fund will rise.
• Risk reduction is another positive impact on a mutual fund’s share price from buying TREPS. Since TREPS are safe instruments backed by the government, the credit risk is more or less absent. By investing in TREPS, mutual funds can also reduce the risk of other assets like corporate bonds or equities. So holding TREPS can reduce volatility for a mutual fund’s portfolio. A lower risk profile can make the fund more attractive to investors, driving the share price.

Negative Impact

• When TREPS investments are of a substantial size and held for a long period, it can limit the overall return potential of the mutual fund. This perceived reduction in return potential can cause the mutual fund's share price to fall as investors adjust their expectations.

Benefits of Investing In TREPS

Investing in TREPS is a good option for investors as it has the following advantages:

Safety

TREPS involves government-issued securities which are considered very safe. This is a big attraction for investors looking for stable investments.

Liquidity Management

TREPS is very liquid, one can buy and sell quickly in the market. This is good for those who want to invest their idle cash in the short term.

Attractive Yield

The yield on TREPS is dependent on the current market conditions and in times of high interest rates, TREPS can give good returns.

Regulatory Guidelines

Mutual funds are required by SEBI to invest a part of their liquid assets in TREPS so that investments are in line with regulatory norms.

Diversification

Adding TREPS to a mutual fund portfolio brings in a liquid and safe investment option which adds to the overall diversification and balance of the portfolio. This diversification can reduce overall portfolio risk, especially during market volatility.

Key Takeaways

• TREPS (Treasury Bills Repurchase) is a short-term investment instrument, widely used by mutual funds, banks and financial institutions.
• TREPS is a safe and liquid investment, offering a good way to generate returns on cash otherwise lying idle. So it’s an appealing option to meet short-term financial goals.
• Buying TREPS ensures SEBI compliance as mutual funds are required to invest a minimum percentage of their assets in these instruments.
• TREPS can give higher returns and increase the share price of the mutual fund but balance is key to not limit the portfolio growth.

Conclusion

TREPS is an important tool for mutual fund management to handle short-term cash. While it provides stability and steady returns, its impact on overall returns and share price depends on its size and tenure in the fund’s portfolio. By understanding the functionality of TREPS and their impact, investors can get an idea about how mutual funds balance safety, liquidity and return potential.

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