Why mutual funds invest in TREPS?

In the world of finance, mutual funds are known for their diversified investment strategies, which include various instruments to optimise returns and manage risk. One such instrument is TREPS or Tri-Party Repo.

If you're exploring options to buy mutual funds or using a stock trading platform, understanding why mutual funds invest in TREPS can improve your investment knowledge and decision-making is really important. 

 In this blog, you will learn about ‘what is TREPS’, why it is a preferred choice for mutual funds, how it benefits investors, and the alternatives available in the market.

What exactly is TREPS?

TREPS stands for Tri-Party Repo, an acronym for a form of short-term borrowing for dealers in the government securities. It involves three parties: the borrower, the lender, and a tri-party agent who acts as an intermediary. TREPS transactions are secured, meaning that the borrower offers government securities as collateral, which adds an extra layer of safety to the investment.

This financial instrument allows mutual funds to leave their surplus funds overnight, ensuring liquidity and safety while earning a small return. The Reserve Bank of India (RBI) introduced TREPS as a more transparent and efficient way for market participants to manage their liquidity needs. It replaced the earlier Collateralised Borrowing and Lending Obligation (CBLO) system.

Why do mutual funds invest in TREPS?

Mutual funds invest in TREPS primarily for liquidity management and risk mitigation. Here’s a deeper look at why TREPS is a preferred choice for mutual fund managers:

1. Liquidity management: Since TREPS is an overnight instrument, mutual funds can access these funds almost immediately, allowing them to meet their obligations without having to sell other investments at unfavourable prices.
2. Safety: TREPS transactions are protected by government securities, making them one of the safest short-term investments available. This low-risk profile is particularly attractive for funds that prioritise capital preservation, such as liquid funds or money market funds.
3. Regulatory compliance: Regulations often require mutual funds to invest a particular amount of their assets in safe and liquid instruments. TREPS fits this requirement perfectly, allowing funds to comply with regulations while still earning a small return on idle cash.
4. Interest income: While the primary motive behind investing in TREPS is liquidity management and safety, mutual funds also earn a modest interest income from these investments. 

How does TREPS benefit investors in mutual funds?

For investors who buy mutual funds, the inclusion of TREPS in a fund’s portfolio can be beneficial in ways such as:

• Lower risk: It adds a layer of security to the fund’s portfolio, which is necessary for conservative investors who prioritise capital preservation over high returns.
• Improved liquidity: By investing in TREPS, mutual funds ensure sufficient liquidity to meet redemption requests promptly. It means that investors can access their funds whenever they need to withdraw without affecting the fund's overall performance.
• Stable returns: Although the returns from TREPS are modest, they are stable and predictable. This stability can be appealing in volatile market conditions, as it helps to smooth out the mutual fund's overall returns.

Why should investors care about TREPS in mutual funds?

TREPS plays a crucial role in ensuring that a mutual fund has the liquidity needed to operate efficiently and meet redemption requests without compromising on safety.

For investors using a stock trading platform to diversify their portfolios, determining mutual funds that invest in TREPS can be a strategic move, especially if you are risk-averse. By including TREPS in their portfolios, mutual funds strike a balance between liquidity, safety, and returns, making them a perfect choice for conservative investors.

How can you use this knowledge when investing?

There’s no doubt that TREPS is a valuable tool for mutual funds, providing safety, liquidity, and modest returns. Hence, if you’re looking to buy mutual funds, consider the role of TREPS in the fund’s overall strategy. Funds that invest in TREPS are likely focused on capital preservation and liquidity management, making them suitable for investors with a low-risk tolerance. On a stock trading platform, you can review the fund’s portfolio details to check for TREPS or similar instruments.