As a finance expert, I often get asked whether mutual funds invest in Treasury bills (T-bills). The short answer is yes, but the details matter. Not all mutual funds focus on T-bills, and those that do serve different investor needs. In this article, I’ll explore the types of mutual funds that invest in T-bills, their advantages, risks, and how they compare to other fixed-income investments.
Table of Contents
What Are Treasury Bills?
Treasury bills (T-bills) are short-term U.S. government debt securities with maturities ranging from a few days to one year. They are sold at a discount and mature at face value, meaning the difference between the purchase price and the redemption value represents the investor’s return.
The yield on a T-bill can be calculated using the following formula:
Yield = \left( \frac{Face\ Value - Purchase\ Price}{Purchase\ Price} \right) \times \left( \frac{365}{Days\ to\ Maturity} \right)For example, if you buy a 91-day T-bill for \$9,800 with a face value of \$10,000, the yield would be:
Yield = \left( \frac{10,000 - 9,800}{9,800} \right) \times \left( \frac{365}{91} \right) \approx 8.19\%T-bills are considered risk-free because they are backed by the U.S. government. However, their returns are typically lower than other fixed-income securities.
Mutual Funds That Invest in Treasury Bills
Not all mutual funds hold T-bills, but several categories do:
- Treasury Money Market Funds – These funds invest in short-term government securities, including T-bills.
- Short-Term Treasury Bond Funds – While they primarily hold Treasury notes and bonds, some may include T-bills for liquidity.
- Ultra-Short Bond Funds – These may hold T-bills alongside other short-term debt instruments.
- Government Securities Funds – Broader funds that include T-bills, notes, and bonds.
Comparison of Mutual Funds That Invest in T-Bills
| Fund Type | Primary Holdings | Average Maturity | Risk Level | Yield Potential |
|---|---|---|---|---|
| Treasury Money Market | T-bills, Repos | < 90 days | Very Low | Low |
| Short-Term Treasury | T-bills, Notes | 1-3 years | Low | Moderate |
| Ultra-Short Bond | T-bills, Corp Debt | 3-12 months | Low-Medium | Moderate |
| Government Securities | T-bills, Bonds | 1-10 years | Medium | Higher |
Why Invest in a T-Bill Mutual Fund Instead of Directly?
Buying T-bills directly is straightforward, but mutual funds offer advantages:
- Diversification – A fund holds multiple T-bills with different maturities, reducing reinvestment risk.
- Liquidity – Mutual funds allow daily redemptions, whereas individual T-bills must be held to maturity or sold on the secondary market.
- Automatic Reinvestment – Funds automatically reinvest proceeds, saving investors from manual rollovers.
However, mutual funds charge expense ratios, which eat into returns. For example, a fund with a 0.25\% expense ratio on a 3\% yield leaves investors with 2.75\%.
Performance and Historical Trends
Historically, T-bill mutual funds have provided stability rather than high returns. During periods of rising interest rates, short-duration funds (like those holding T-bills) perform better than long-term bond funds because they can quickly reinvest at higher yields.
Consider two scenarios:
- Low-Rate Environment (2020-2021) – T-bill yields were near zero, making these funds less attractive.
- High-Rate Environment (2022-2023) – With the Fed raising rates, T-bill funds saw higher yields.
Tax Considerations
Interest from T-bills is exempt from state and local taxes, making them attractive for investors in high-tax states. However, mutual funds distributing this interest pass along the same tax benefits.
Alternatives to T-Bill Mutual Funds
If liquidity and convenience aren’t critical, investors might consider:
- T-Bill ETFs – Lower expense ratios than some mutual funds.
- Direct Purchase via TreasuryDirect – No management fees, but less flexible.
- Bank CDs – Similar safety, but with early withdrawal penalties.
Final Thoughts
Treasury bill mutual funds are a solid choice for conservative investors seeking safety and liquidity. While they won’t deliver high returns, they provide stability, especially in volatile markets. Before investing, compare expense ratios, yields, and tax implications to ensure alignment with your financial goals.
