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A mutual fund is one of the best instruments in the world for long-term investment. It has thousands of schemes. each one has different and unique characteristics. This scheme includes low-risk to high-risk mutual funds. Equity mutual fund is considered one of the risky funds and Debt fund is considered one of the lowest-risk funds. Also, its return-generating capacity is linear with the risk. In this blog, we will see a concept, which did not require to invest for a long time and parallelly scheme gives a significant return. can you guess the concept that we are talking about? Dear readers, we are talking about the TREPS. In this blog, we see what exactly TREPS is. How it works,  Why the mutual fund invests in TREPS. 

• What is TREPS? 

TREPS stand for treasury bill repurchase. It is a short-term investment option. It works between two parties. In this method, one party sell its securities to another party to borrow money.  

Suppose, X is a bank and Y is a mutual fund. If X needs Rs. 100 crore, bank X will sell its securities to mutual fund Y and take the money at some interest rate. Suppose the period is 1 day and the annual interest rate is 5%.

Total amount to be paid by bank X to mutual fund Y:

Initially, mutual fund Y will pay Rs. 100 crore.

Then how much money will be paid for X .....

The total amount required for purchase of securities + one-day interest rate

= 100 crore + 15 lakh

= 100.15 crore

• Why do mutual funds invest in TREPS?

1. Risk and Returns:

TREPS is a short-term investment process. Since it mainly involves government securities, credit risk is considered the major risk in it. When interest rates are high in the market, TREPS gives good returns. This is a great facility for mutual funds that provides returns in a short period and without any risk.

2. Liquidity:

Sometimes mutual fund investors also redeem in large quantities, at that time investment in TREPS becomes beneficial because it has a large amount of liquidity.

3. Diversification:

As we know, mutual funds invest in various assets. Along with investments like stocks, commodities, and debt, investment in TREPS brings diversity to mutual funds. Due to this diversity, the risk of the fund is reduced.

4. Investment period:

Generally speaking, mutual funds are a long-term investment option. However investment in TREPS is good for the short-term.

5. Regulatory Compliance:

The mutual fund industry runs completely under the guidance of SEBI and AMFI. SEBI has mandated that all mutual funds should keep 5% of their liquid assets for TREPS.

• Benefits of investing in TREPS:

1. Good returns according to economic conditions

2. Trust as they are government securities

3. Helps in reducing risk

4. Good liquidity for short-term investments

5. Safety as SEBI and government are involved

• Conclusion:

While there are various investment options available in mutual funds, TREPS plays an important role. The ability to earn high returns with low risk makes TREPS special. Many times, investing in TREPS has a positive impact on the NAV of the fund, and inversely, when the interest rate is low, the returns of the fund decrease, thus reducing the NAV to some extent.

FAQ:
 

1. Is exit load applicable on investments beyond one year?
 

Ans: Exit load depends on the type of mutual fund and the scheme. Most mutual funds have a redemption period of 1 year or 3 years. Some funds also impose an exit load after this period.
 

2. In which funds, Exit Load is not applicable?
 

Ans: In liquid funds, Exit Load is not applicable due to high volatility.
 

3. How can avoid Exit Load?
 

Ans: All the rules regarding exit load are given in the information sheet of that fund, in which they have given information about the minimum period required for the fund. If you want to read this from the exit load, then you have to keep the investment for the given period.
 

4. Can I withdraw investment from a mutual fund at any time?
 

Ans: Most mutual funds provide the facility of exiting the investment. But many companies charge different fees while exiting the investment, which we call Exit Load.
 

5. What is the maximum exit load in a mutual fund?

Ans: Exit load depends on the type of fund. But in India, the general range of exit load is from 1 to 3%.