Choosing the right kind of investment can be difficult. Usually, your financial goals can help you determine the kind of investment that meets your needs. Treasury bill and fixed deposit are popular investment instruments.
As you read this, you might be wondering which one is better, treasury bill or fixed deposit? While both are good investments, the differences between the two can help you make better investment decision.
In this article, I will talk you through the differences between fixed deposit and treasury bill. First, let’s look at what both terms mean.
What is Fixed Deposit?
A fixed deposit is a short term financial investment sold by banks to their customers. A customer may invest in a fixed deposit account at a certain rate of interest for a specific period.
The period could be a month, three months, six months or a year. The return on fixed deposits is known to be higher than regular bank deposits (savings).
So, if you open a fixed deposit account, you give your money as a loan to a bank in exchange for repayment with interest for a specific period.
What is Treasury Bill(T-bill)?
Treasury bill is a financial instrument issued by the central bank of a country either on its own account or on behalf of its government.
It is a short-term investment product with a tenure of 91days, 182days or 365 days.
When you buy treasury bill, you give your money as a loan to the government for capital plus interest for a specific period.
Differences Between Treasury Bill and Fixed Deposit?
The profitability of both fixed deposit and treasury bill can be determined by which pays the best interest rate. The interest on fixed deposits are paid based on the credit rating of the bank of the depositor.
Most banks pay different interest rates relative to the amount of money and tenure of investment.
With treasury bill, interest rate is determined through a biweekly auction or a period as determined by the central bank, to registered and licensed financial institutions.
To know the most profitable interest, you will have to check the prevailing T-bill rate at a specific period and compare to the fixed deposit rates offered by your bank.
2. Risk and credibility
Treasury bill is backed by the government. Government can’t go broke or run away with your money, making treasury bills credible and risk free.
However, fixed deposits are only considered safe as long as your bank exits. If your bank becomes insolvent, you lose all or part of your money. Therefore, fixed deposits are riskier investments compared to treasury bills.
3. Tax Benefits and Fees
Treasury bills are tax exempted, which means that taxes are not deducted from the interest you earn. But, you may be required to pay a small fee for bank processing.
Fixed deposits attract about 10% annual withholding tax on interest payments deductible at source by your bank. You may not pay a fee to have a fixed deposit account.
4. Investment Roll Over
You can instruct your bank to roll over your fixed deposit and interest from the start. It is a default way to enjoy compounding interests.
However, treasury bills cannot be rollover by default.
The central bank pays your earnings into your account at maturity and you have the option to either roll over or withdraw.
5. Collateral Usage
Most banks accept treasury bill as collateral for loans. This is because it is considered as secure and risk free.
Fixed deposits can also be used as collateral but not accepted by most banks.
However, it’s seen as riskier than treasury bills as it could be affected by the credit ratings of the holding bank.
6. Ease of Withdrawal
You can inform your bank and withdraw from your fixed deposit account any time before maturity.
However, you will only be paid interest for the period you kept your money with the bank. You may also be charged extra fees for early withdrawal.
Cashing out treasury bill before maturity is not that flexible and straightforward. You must sell the rights of the treasury bills to the bank or to a willing buyer before the tenor expires.
The remaining interest for the period between when you canceled the investment and when it matures will be deducted from your principal by the buyer.
I hope these differences guide you on choosing between investing in treasury bill or fixed deposit. If you have any knowledge you want to share, please comment below.