In India, liquid exchange-traded funds (ETFs) have gained considerable attention due to their flexibility, low-risk nature and high liquidity. These exchange-traded funds include low-risk assets like money market securities and overnight investments, typically with a 1-day maturity. They offer Indian investors a convenient and efficient way to park idle funds temporarily, with the potential for better returns than a savings account. With increasing access to online trading platforms, liquid ETFs have become a popular choice for investors looking for short-term returns.
Liquid exchange-traded funds are short-term debt instruments that invest in assets like money market instruments and low-risk overnight securities. These funds have a 1-day maturity and are traded on stock exchanges like the National Stock Exchange (NSE) and BSE. These funds offer a greater level of accessibility and flexibility.
Dividends from liquid ETFs are calculated daily and reinvested as additional units, which are credited to your demat account every 30 days. Their liquidity makes them a preferred choice for brokers, who often accept these units as margin for trading.
Following are the individuals who can invest in liquid exchange-traded funds:
To start investing in liquid ETFs, you need to first open a demat account, as it is necessary for holding and trading in ETF units. Next, choose a liquid ETF that matches your requirements and investment timeframe. After making your selection, you can place orders for ETF units through your trading account during stock market hours.
Here is why liquid ETFs can be a smart choice:
Instead of leaving your money idle in a margin account or earning minimal interest in a savings account, liquid ETFs ensure your funds start generating returns as soon as the trade settlement clears. This eliminates the loss of potential returns during idle days.
Liquid ETFs are easy to buy and sell, whether through the stock market or the issuing mutual fund. Their high liquidity level allows you to quickly access funds for attractive investment opportunities.
Liquid ETFs can enhance transparency by providing daily updates on your portfolio holdings, giving you a clear insight into the assets and strategies employed by the fund.
Liquid ETFs simplify the process of managing your funds. You no longer need to transfer money frequently between your trading and bank accounts or wait for cheque clearances and electronic transfers.
In contrast to numerous other investment options, liquid ETF trading does not incur STT, thereby lowering the overall expenses for both short-term and long-term investors.
The expense ratio for liquid ETFs is generally low in comparison to mutual funds.
Here are some disadvantages of investing in liquid ETFs which you must be aware of:
Liquid ETFs are subject to market fluctuations. While they aim for stability through short-term investments, they are not immune to broader market risks that can impact their value.
In liquid ETFs, you do not have control over the individual securities within the ETF's portfolio. This means you cannot selectively avoid certain stocks or sectors that you may wish to exclude for personal reasons.
The applicability of tax on liquid ETFs is similar to stocks. Here is a detailed breakdown of how liquid ETFs are taxed in India:
When investing in liquid ETFs, it is crucial to evaluate the following factors to ensure your investment aligns with your financial goals:
Understand your financial goal before investing. Liquid ETFs are ideal for parking surplus funds temporarily or managing short-term liquidity while earning reasonable returns.
Liquid ETFs are best suited for investors with a short-term investment horizon, ranging from a few days to months. If your timeline is longer, consider other debt or equity-based funds.
Assess your ability to handle market risks. While liquid ETFs are low-risk investments, their returns may vary slightly based on market fluctuations and liquidity in underlying securities.
Check the credit quality of the instruments in the ETF’s portfolio. The higher the credit quality of the instruments, the lower the chances of default risk.
Review the past performance of the liquid ETF to understand its consistency in delivering returns. While past performance does not guarantee future results, it provides insights into fund management quality.
Liquid ETFs offer Indian investors an excellent solution for parking short-term funds in a safe, liquid and low-risk investment. However, they are not suited for long-term capital growth, and investors should carefully assess their risk tolerance, investment horizon and financial goals before investing.