Balancing volatility and returns is the ultimate goal of an investment. Liquid ETFs have the liquidity benefit and the risk of interest rate fluctuation. Still, they make for an attractive option for the short term
Outlook Money, in collaboration with ICICI Prudential AMC, hosted a webinar as part of the ‘Investment Made Easy’ series to discuss liquid ETFs and their potential as a flexible financial instrument. Moderated by Versha Jain, the session brought together Shradha Thakker, Lead Strategic Product Development at ICICI Prudential AMC, and Kaushik Ramachandran, Founder and CEO of Dyota Solutions Private Limited, to provide an in-depth understanding of liquid ETFs. Here are the takeaways.
Thakker highlighted that liquid ETFs act as a link between traditional savings and higher-yield investment options. She explained that these funds invest in highly liquid instruments such as treasury bills and tri-party repos with maturities of less than 91 days. “Their low-risk nature and ability to provide same-day liquidity make them a prudent choice for managing surplus funds,” she stated.
Ramachandran highlighted the ease of investing in liquid ETFs, likening the process to trading stocks. “ A demat account and broker association are all you need. Transactions are settled on a T+1 basis, offering both convenience and efficiency,” he said.
While liquid ETFs boast numerous benefits, Thakker underscored the importance of understanding the risks. She explains that interest rate fluctuations and potential liquidity constraints can impact returns. However, the underlying debt instruments in these ETFs help mitigate volatility and provide stability for short-term investments.
Thakker also explained tax implications and said that liquid ETFs are taxed at the investor’s income slab rate, in contrast to equity ETFs, which enjoy favourable long-term capital gains tax rates. Investors were urged to factor in these differences when exploring their options.
Ramachandran discussed liquid ETFs’ strategic advantages for high-networth individuals and frequent traders. “These ETFs are particularly beneficial for those seeking to optimise idle cash or use them as margin funding for equity trades,” he remarked. The low expense ratios and efficient structure make these ETFs cost-effective for managing short-term cash flows while earning competitive returns.
Thakker added that choosing the right liquid ETF requires careful evaluation of the fund’s expense ratio and the reputation of the asset management company. “These factors ensure lower tracking errors and better liquidity on exchanges, making transactions seamless for investors,” she said.
These ETFs fill the gap between savings accounts and traditional mutual funds by providing a flexible option to manage short-term capital. Kaushik Ramachandran concluded, “For durations under a month, liquid ETFs offer unparalleled convenience and efficiency in today’s financial landscape.” For investors looking to diversify their portfolio or park surplus funds, liquid ETFs present a promising option.
The webinar underscored that with careful planning and informed decisions, investors could utilise liquid ETFs to unlock greater value from their idle cash.
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Disclaimer: The information set out above is included for general information purposes only and is not exhaustive and does not constitute investment or tax advice. Mutual Fund investments are subject to market risks, read all scheme-related documents carefully. Investors are requested to review the prospectus carefully and obtain expert professional advice with regard to specific legal, tax and financial implications of the investment/participation in the scheme