All you want to know about Liquid ETFs | The Financial Express

All you want to know about Liquid ETFs

Liquid Exchange Traded Funds (ETFs) are mutual funds that invest in highly liquid short-term debt securities or simply money market instruments.

Liquid ETFs
Here's all you need to know about Liquid ETFs. Representational image

By Chintan Haria

Liquid Exchange Traded Funds (ETFs) are mutual funds that invest in highly liquid short-term debt securities or simply money market instruments. So, if you are a direct stock investor and is wondering how to best utilise the cash lying idle in trading account, then liquid ETF offers an excellent avenue for parking such money and earning returns on the investment.

Ways to Invest in Liquid ETFs? 

Liquid ETFs are traded on the stock exchanges just like a company stock. They are listed on the cash market segment of the NSE and BSE and hence it is imperative to have a demat account.

Advantages of investing in Liquid ETFs

Efficient Liquidity Management: Normally, when one sells shares, the sale proceeds are credited two days after the trade is executed. If one is a trader, then he/she can immediately buy liquid ETFs for an equivalent amount of the shares you are selling on the date of the settlement itself. In this way, one can start receiving returns on investments from the date of the settlement itself. One can also instruct the broker to buy or sell liquid ETFs to fund the purchase of future transactions. In this manner, liquid ETFs allow you to manage money more efficiently. 

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Convenience: Given that liquid ETFs are listed on the exchanges, it is convenient for equity investors to direct their brokers to carry the necessary buy and sell seamlessly. This is much more efficient than the traditional means of waiting to move the money between the bank and the broker 

Highly liquid: Liquid ETF as an instrument is highly liquid and can be purchased or sold at ease on the exchanges. 

For margin management:  Traders and investors, F&O participants and institutions can buy liquid ETFs for maintaining margin money with the brokers.

Dividend Option: There are multiple approaches to dividend distribution among the fund houses. Some fund houses reinvest the dividend, and additional fractional units are issued which can be sold through brokers or held for the long term. The other approach, as followed by ICICI Prudential, is to credit the dividend accrued to an investor’s bank account. 

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Who should invest in Liquid ETFs  

Liquid ETFs are best suited for those who have surplus funds lying idle in a trading account. It is also an easier and convenient way to use idle cash lying in a margin account. Individual investors can also consider liquid ETFs as an effective short-term investment option.

(The author is Head of Investment Strategy at ICICI Prudential AMC)

Disclaimer: Views expressed are personal and do not reflect the official position or policy of Financial Express Online. Reproducing this content without permission is prohibited.

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First published on: 18-01-2023 at 10:06 IST