By Chintan Haria, Principal- Investment Strategy, ICICI Prudential AMC
In recent weeks, market traders and investors have faced increased indecision, with many opting to keep their investments on the sidelines waiting for the markets to stabilise or for a good investment opportunity to emerge. With so many traders and investors holding cash in their savings accounts or redeeming profitable stock positions, the challenge now is how to manage these idle funds while waiting for the next big investment opportunity. The primary dilemma is that funds sitting in savings accounts or margin accounts don’t generate much returns, leaving traders and investors with little option but to wait without earning income. Transferring funds between trading and bank accounts can also be a hassle, accompanied by various fees and the inconvenience of net banking transfers.
Also, there are times when investors might need immediate access to funds-whether for an emergency, a confirmed cash outflow or simply because they have received a lump sum payment and want to park it temporarily before making a final decision.
Instead of letting this money sit idle, a better alternative would be to park it in liquid exchange-traded funds (ETFs) for short-term needs.
What are Liquid ETFs?
Liquid ETFs are a specific category of ETFs that invest primarily in overnight security i.e. Tri-Party Repo (TREP). The primary objective of liquid ETFs is to provide high level of liquidity for investors.
These ETFs track indices like the Nifty 1D Rate Index and BSE Liquid Rate Index. The Nifty 1D Rate Index captures returns from the overnight lending market, using CBLO rates. Meanwhile, the BSE Liquid Rate Index tracks the returns from daily rolling deposits based on the Tri-Party Repo (TREP) rate.
They are considered safe investments because they track the Reserve Bank of India’s overnight rate, using a Triparty Repo (TREPs) as their benchmark. Hence, these ETFs invest in very short-maturity (typically overnight or ultra-short-term), low-risk debt securities.
Since Liquid ETFs are listed and actively traded on stock exchange, one can buy or sell them during market hours.
Dividends from liquid ETFs are calculated daily and reinvested as additional units, which are credited to your demat account every 30 days. Settlement typically occurs on the T+1 day (i.e., the day after the trade) and they carry a low expense ratio, making them a cost-effective option for short-term investors.
How Liquid ETFs Can Be Used
Traders can use liquid ETFs strategically when exiting positions in the stock market. Upon selling a stock, the proceeds can be temporarily parked in liquid ETFs, generating returns while awaiting the next opportunity to invest. Unlike keeping funds with brokers, where no interest is earned, liquid ETFs offer the advantage of returns from the day of settlement until the day they are sold, optimising capital use. In addition, liquid ETFs can be pledged as collateral for margin requirements when trading in the derivatives market. Brokers often accept them as cash-equivalent margins, offering up to 90 per cent of the ETF's value as margin. This allows investors to leverage their liquid ETF holdings to trade in futures or other derivatives. Liquid ETFs also make it easier for investors to move money from one asset to another, build strategies around their investment and manage intra-day portfolios.
When an investor receives a lump sum payment, such as a bonus or a settlement or sale of property, they may consider parking funds temporarily before deciding on a long-term investment strategy.
Liquid ETFs also provide an alternative to traditional savings accounts or fixed deposits for keeping emergency funds or even for low-risk appetite investors who are looking for consistent daily returns without committing their funds for an extended period.
For investors seeking to maximise returns on idle funds while ensuring safety and liquidity, liquid ETFs are an excellent short-term investment option. Offering a balanced mix of liquidity, low risk and potential returns, liquid ETFs provide a smart way to park your funds temporarily while keeping your capital working for you.
(Disclaimer: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.)
