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Liquid ETFs: Do you also trade or invest in the stock market? If yes, then Liquid ETFs can be a better option for you. Let us understand what is the logic behind it. When a stock market trader or investor sells his investment, he faces two problems before reinvesting his money. Let’s say someone invested you in the stock market and your investment increased in a few months. Now you want to sell it to earn profit. You will place a sell order on the first day. On the second day your stock will be debited from your demat account and on the third day your money will be credited to your margin account. Now your choice whether you want to keep those money in margin account or transfer it to bank account till you make new investment.
How are Liquid ETFs profitable?
As a stock market investor, you may be confused that your money will remain lying in the margin account and will not earn any interest. You must also have time to transfer money from trading account to bank account. Liquid ETFs are the solution to both your problems. They invest in low-risk overnight securities such as Collateralized Borrowing and Lending Obligation (CBLO), repo and reverse repo securities. They give you dividend on a daily basis which is reinvested in the fund. These are low in risk and you can withdraw money whenever you want.
Which Liquid ETF to choose?
Before investing in liquid ETFs, compare their returns and expense ratios against the benchmark. The expense ratio of ICICI Prudential Liquid ETF is 0.25%. At the same time, the expense ratio of DSP Nifty Liquid ETF is 0.64 per cent, while the expense of Liquid BEES of Nippon India ETF is 0.69 per cent.
For retail investors, it is prudent to buy units of liquid ETFs by instructing the broker to invest the same amount at the time of sale of equity shares. When the investor wishes to buy some equity shares, one can ask a broker to make the purchase using a liquid ETF which can be used as margin money.
The returns earned by Liquid ETFs are relatively more stable as such short-term debt securities are less prone to price fluctuations as compared to longer term ones. Moreover, these liquid ETF units can be freely sold in the spot market in a short span of time and can be easily cashed out. In addition, there is no Security Transaction Tax (STT) levied on the purchase or sale of liquid ETF units. If you are a general investor who is wondering where to invest for a short period of time and gives better returns than traditional investment options, then a liquid ETF can prove to be better for it.
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