Liquid ETFs spell smoother demat operations and better use of idle cash

The steadily rallying equity markets have brought in new investors by the millions. For retail as well as institutional investors who take exposure to stocks and other equity investments via their demat accounts, there is a constant operational challenge of managing idle cash after each sale, till such time as they find a new idea. The cash lying in the trading accounts can be managed well and put to better use by investing in liquid ETFs (exchange traded funds). 

Liquid ETFs invest in the safest of debt instruments. These ETFs traded on the BSE and NSE and are benchmarked to the S&P BSE Liquid Rate or the Nifty 1D Rate indices.

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. 

Secure investments 

The S&P BSE Liquid Rate or the Nifty 1D Rate move based on the Tri-Party Repo Rate. The three parties involved in the transactions are the borrower, lender and intermediary (Clearing Corporation of India Limited or CCIL).

Now, TREPS (Tri-Party Repo Dealing System, operated by the CCIL under RBI guidelines), banks, insurance companies, non-banking finance companies, mutual funds, primary dealers borrow and lend in the overnight market at the tri-party repo rate.

Liquid ETFs invest in these overnight instruments – mostly TREPs, and also other avenues such as repo, reverse repo etc. Since they are overnight instruments, they carry no interest rate or credit risk.

Most liquid ETFs offer the dividend option (IDCW: Income Distribution cum Capital Withdrawal). Dividends are declared daily and the NAV (net asset value) of the fund generally remains Rs 1000. A few liquid ETFs give daily dividends in the form of additional ETF units. These can be fractional units as well. However, most funds directly credit the dividend amount to the investor’s account. Any such dividend paid is added to the investor’s income and taxed at the slab rate applicable.

Ease of operations

Liquid ETFs smoothen the investment process by the optimal management of cash for stocks and derivatives traders.

Earn more on cash: The unused funds in your trading account earn no interest and may later be moved to your bank account. 

When you invest in liquid ETFs, the funds earn returns every day. Therefore, for investors trading with large amounts on a regular or everyday basis, the interest earned on idle funds from liquid ETFs can be substantial. 

Smoother transactions: Investors selling shares can give a ‘buy’ order for liquid ETFs of the same amount value. Most well-known brokers allow you to buy liquid ETFs for the entire amount on the same day as you sell shares. Others may have a different margin policy.

Units and IDCW dividends would be credited to your trading account on a T+1 day settlement basis. 

Futures and options (F&O) traders get margins: Given the huge interest around the derivatives markets, margin management is critical. F&O traders can pledge liquid ETFs as collateral and brokers usually offer 90-92% of the value as margin, which is a significant amount.

Money transfer for trades gets simplified: All the money lying idle in a trading account has to be returned to the linked savings account of the investor periodically. Therefore, when a good investment opportunity comes at short notice, it becomes a time-consuming process to transfer money from your bank to your trading account. And if any technical problems occur with the payment gateway, it will mean more hassles and possibly lost opportunities. On the other hand, if you hold liquid ETFs in your account, you can quickly sell the units and execute your trade without delay.

Modest charges: These ETFs carry no securities transaction tax (STT) (as they are debt funds). So, the overall costs of transacting are quite low.

In effect, Liquid ETFs, provide an efficient way for investors to manage idle cash and aid in smooth transactions for traders. This makes them ideal for all types of investors – retail, institutional and  traders.