Liquid ETFs: Invest to add efficiency and optimisation to your portfolio | The Financial Express

Liquid ETFs: Invest to add efficiency and optimisation to your portfolio

The advent of online broking and superior internet penetration over the last couple of years has brought a new set of investors to equity investing.

Liquid ETFs: Invest to add efficiency and optimisation to your portfolio
Designed for low risk, high liquidity and safety of capital, these passively managed debt funds are traded on NSE and BSE during market hours.

By Harshvardhan Roongta, Principal Financial Planner, Roongta Securities

India has been witnessing a surge in direct equity investing. The advent of online broking and superior internet penetration over the last couple of years has brought a new set of investors to equity investing. As a result, India crossed 100 million Demat accounts recently.

Many of these investors are first-time investors and traders who transact very frequently and want to be efficient and hence look to book profits by selling their shares and derivative positions. However, the funds from sales proceeds are usually kept with the broker in the margin account without any returns or are transferred to the investor’s savings account, which earns savings bank interest.

Another critical thing to be mindful of is that the funds are available only on a T+2 days basis, which means that the funds could be used only 2 days after the sale transaction. Also, for derivative traders, the margin requirement keeps changing daily based on open positions; hence, it is a tedious task to move funds daily to manage the margin requirements.

For equity investors and traders who are looking to add efficiency and optimisation, Liquid ETF is a solution they can explore. Designed for low risk, high liquidity and safety of capital, these passively managed debt funds are traded on NSE and BSE during market hours. These have a high degree of liquidity and can provide quick access to capital when needed. Such ETFs track the overnight rate as the benchmark and predominantly invest in Tri-party Repo (TREPS) which facilitates the borrowing and lending of funds in a Tri Party Repo arrangement and hence it ensures that the funds are invested in very low-risk and high-liquid instruments.

More importantly, Liquid ETF endeavors to maintain a constant NAV by having only a daily income cum capital withdrawal plan in which a dividend is declared daily of the gains/income accrued. There are multiple approaches to the dividend declared by these Liquid ETFs. Some liquid ETFs reinvest this dividend, and fractional units are issued against it, which also can be sold through the broker. ICICI Prudential Liquid ETF, on the other hand, credits the investor’s bank account every month with the dividend accrued. In both cases, the NAV does not appreciate much. The dividend income, however, is taxable in the hands of investors.

In terms of liquidity management too liquid ETFs have some distinct advantages. When selling shares, a direct investor can instruct the broker to invest all the sale proceeds in a Liquid ETF, which most brokers readily do. As a result, until the investor finds another opportunity to redeploy funds, the investor is earning at least some returns. Similarly, whenever one buys a share, the broker can sell the equivalent value of Liquid ETF units and the transaction can be settled. For derivative traders, the units of Liquid ETFs can be used as a margin for trading in Futures and Options. Using Liquid ETF as a margin eliminates the hassle of moving funds to the broker account to meet margin requirements which keep fluctuating daily and help generate returns right from the date of settlement till the date of liquidation.

Another advantage of liquid ETFs is their very low expense ratio. By minimising costs, liquid ETF can aid in improving overall performance. Among the three liquid ETFs available, ICICI Prudential S&P BSE Liquid Rate ETF is the cheapest with an expense ratio of 0.25 per cent. The next cheapest ETF is from DSP at 0.64 per cent and Nippon at 0.69 per cent.

In a nutshell, whether you are an active investor or a trader who is looking to have an effective tool for cash management, or a passive investor who wants to park funds temporarily, then liquid ETFs should be on your radar.

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First published on: 12-10-2022 at 19:52 IST