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TREPS Explained : What It Means and Why Mutual Funds Invest in Them

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Published Date: 12 Nov 2024Updated Date: 18 Nov 20246 mins readBy MOFSL

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Introduction

The world of mutual funds is as lucrative as it is vast and dynamic. An excellent yet overlooked financial instrument that influences a mutual fund's overall performance is TREPS. If you have never heard of TREPS before, then you are in the right place!

This article will explain what TREPS is, its advantages, and the reasons mutual funds invest in them.

Meaning

TREPS stands for Treasury Bills Repurchase. It’s a popular money market financial instrument representing a short-term lending and borrowing agreement between the lender and borrower. Usually, the borrower is an institutional investor, such as mutual funds. The most commonly pledged securities in this equation are Treasury bills placed with a lender, such as a bank or any financial institution, for borrowing funds. In lieu of the funds provided by the lender, the borrower agrees to repurchase the securities pledged at a predetermined price and date, including some interest.

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Transactions in TREPS are often used in the short-term and can last for up to a couple of weeks. Therefore, pledging existing securities makes TREPS an ideal means to raise short-term funds. This feature makes them the perfect fit for mutual funds.

Benefits of Investing in TREPS

Understanding the benefits of investing in TREPS is the first step to understanding why mutual funds invest in them.

According to the Securities and Exchange Board of India, all mutual funds must include TREPS in their investment portfolio. So, investing in them ensures automatic compliance, reassuring investors that they are abiding by the required regulatory framework.
TREPS not only offers stability and liquidity but also provides instant portfolio diversification, reducing the risk involved. This, in turn, ensures the investment portfolio can weather market fluctuations.
The government backs TREPS, so there is no fear of default. This alone provides the necessary assurance that investors seek.
The returns offered by TREPS are adjusted according to the prevailing market conditions. So, investors can reap high interest rates even when their funds are idle.
Another benefit of investing in TREPS is its liquidity. These highly liquid securities offer instant access to the money market, making them perfect for institutional investors. Also, buying and selling TREPS is easier than most instruments.

Mutual Funds and TREPS

Now that you are aware of the benefits of investing in TREPS let’s see how they benefit mutual funds.

Managing Liquidity

All mutual funds must maintain sufficient funds to fulfill investor withdrawals. TREPS not only offers profitable parking for idle funds but also grants quick and easy access. This enables mutual funds to earn interest until the required sum needs to be redeemed.

Fulfilling Short-Term Financial Requirements

At times, mutual funds require short-term funding to either seize an investment opportunity or fill any short-term fund gaps. In both these instances, TREPS come in handy.

Optimising Returns

A common reason mutual funds invest in TREPS is to optimize the returns for their investors. By parking funds in TREPS and pledging their securities, mutual funds can earn extra income without compromising the investment portfolio’s integrity. The returns from TREPS also add to the mutual fund's net asset value, which in turn has a favorable effect on share prices.

Maintaining Regulatory Compliance

As mentioned, according to SEBI’s guidelines, all mutual funds are duty-bound to invest in TREPS and set aside a minimum of 5% of their total assets for liquidity. So, by adhering to this requirement, it also increases the investor’s trust in the authenticity of the fund.

Portfolio Diversification

All mutual funds actively seek portfolio diversification. What better way to do this than by investing in government-backed securities? This is where TREPS step into the picture. TREPS diversifies an investment portfolio and acts as a hedge against market fluctuations and risks.

Conclusion

TREPS are not only an important but a vital investment tool and strategy that mutual funds rely heavily on. This instrument also facilitates portfolio diversification, from helping mutual funds manage their liquidity requirements to raising short-term capital and ensuring regulatory compliance.

That said, as with any other form of investment, TREPS also carries a little risk. Therefore, investors should not only have a thorough understanding of their workings but also conduct the required research to make sound and safe investment decisions.