For investors in search of short-term investment avenues, Liquid ETFs are amongst the best options available. Here is a lowdown on Liquid ETFs and how they can help you make your money work smarter.
Secure short-term investments
In India, Nifty 1D Rate Liquid Index and BSE Liquid Rate Index are the benchmark indices for short-term investments and they largely track TREPS, alongside repo, reverse repo and so on.
Tri-Party Repo (TREPS) is a short-term money market instrument in India, managed by the Clearing Corporation of India Ltd (CCIL) under RBI guidelines. CCIL acts as an intermediary between lenders and borrowers, who are typically mutual funds, banks and other financial institutions, and these parties transact in the overnight market at the tri-party repo rate.
Rated low risk in the Risk-O-Meter, per SEBI regulations, Liquid ETFs, trading on both NSE and BSE, predominantly invest in TREPS, which ensures daily returns, very low volatility, no interest or credit risk.
Most liquid ETFs offer the Income Distribution cum Capital Withdrawal (IDCW) option and distribute dividends daily either in the form of funds or additional ETF units credited to the trading account, while the NAV stays constant. Daily distribution of dividends results in taxation at marginal slab rates.
Few fund houses also offer Growth NAV option in their Liquid ETFs, allowing for potential tax efficiencies, attracting tax only at the time of sale of the ETF. It also helps with better trackability of returns.
Efficient cash management
Investors could consider liquid ETFs for investing their idle funds, as part of cash management techniques, as a temporary parking vehicle, when the funds are earmarked for specific purposes or predicted cash outflows. However, the priority list for investing in liquid ETFs should start with capital protection and low volatility, with little importance for capital appreciation.
Money lying idle in a trading account is periodically transferred to the linked savings account. While the trading and savings accounts offer zero and nominal interest rates in the range of 2-3 per cent respectively, liquid ETFs generate better yields than these traditional avenues, in the range of 5-6 per cent. This is lucrative for investors or traders dealing with huge sums and the opportunity cost of not investing in liquid ETFs could be sizeable.
Also, it is easy to switch between liquid ETFs and other investment opportunities within your trading account, than to transfer funds from your bank accounts, relatively saving on operational tussles. PMS (portfolio management service) providers, high net-worth investors (HNIs), futures and options traders and even mutual funds use liquid ETFs regularly. These liquid ETFs may be useful for retail investors as well.
As all ETFs boast of, Liquid ETFs too have lower expense ratios around 0.2-0.3 per cent. Liquid ETFs are also free of Securities Transaction Tax and depository charges on sale or purchase of units, thus making them cost-efficient.
Added perquisite include using investments in liquid ETFs as collateral for margin trading facilities, and since these ETFs are considered as cash equivalents, the haircut when collateralized is also amongst the least.
