Advantages of investing in liquid ETFs
In the present time, liquid ETFs are considered to be the safest investment option in the mutual funds basket. Active stock-market investors seeking innovative options to utilise idle money kept in the broker’s trading account often prefer liquid ETFs. Liquid alternative ETFs as the subset of liquid alternatives are a relatively newer concept majorly because of the lack of knowledge regarding its benefits and the misconceptions surrounding it. For example, institutional investors perceive liquidity during market stress and the prime disadvantage of liquid ETFs. The reality, however, is way off-liquid ETFs have been found to be sufficiently liquid in most market conditions.
In India, Nippon India ETF liquid bees (NSE Symbol: LIQUID BEES), ICICI Prudential Liquid ETF (ICICILIQ) and DSP Liquid ETF (LIQUIDETF) are currently available with the first one being the oldest and most actively traded.
Below are some prime advantages of liquid ETFs-
1. Low returns
Liquid ETFs offer daily dividends as the sole plan which is compulsorily reinvested in the ETF and is accrued to the investors. While DSP liquid ETF and Nippon India ETF and provide additional units for the dividend amount and credit to investors’ Demat accounts once a week, ICICI liquid ETF credits the dividend once a month. Despite the dividends being fractional units, they can be sold through brokers using MFSS and StarMF platforms. Further, since AMCs constantly endeavour to keep the daily NAV at Rs 1,000, no capital gain is applicable.
While ICICI Prudential liquid ETF tracks the S&P BSE Liquid Rate, DSP liquid ETFs and Nippon India follow Nifty 1D Rate Index. These indices use the “Triparty Repo Dealing System (TREPS)" overnight rate for the computation of index values. Thanks to RBI’s initiatives that eased liquidity conditions in the banking system, TREPS’ one-year return dropped to 3-4% from an annualised return of 6-7%. The returns from these ETFs are closer to these rates.
2. Increased transparency
Unlike some alternative investments, liquid alternative ETFs provide exceptionally high transparency in terms of investment strategy, reporting, holdings and fee. This gives investors a much clearer picture of where their money is going.
3. Efficiency in cash management
Liquid ETFs are specially curated to provide high liquidity and low-risk returns. Investors get two-fold perks. Firstly, while selling equity shares in the exchange, he can simultaneously instruct the broker to purchase equal units of a liquid ETF for the same amount.
On the settlement date, these units are credited to the Demat account. Hence, the investor can retain his investments in the liquid ETFs as long as there’s a better opportunity to deploy the money. This shall enable them to earn some returns during that period. Secondly, liquid ETFs units can also be utilised as a cash-equivalent margin in futures and options (F&O) trades.
4. Enhanced diversification
Liquid ETFs have always showcased low correlations with traditional asset classes. Historically, this has led to mitigated risk and increased diversification.
In practice, Investors use liquid ETFs strategically as a diversifying, long-term portfolio component. Its tremendous transition management also makes it a great alternative to money market funds and cash with respect to efficient market exposure at a reasonable cost. With these benefits, liquid ETFs are gaining pace in the market.
