Make your money work with liquid ETFs

Active retail investors can consider this option to park idle money for the short run

If you are an active stock-market investor looking for ways to get the most out of your idle money prior to a trade, liquid ETFs (exchange-traded funds) may be the product you need.

Liquid ETFs are passively managed debt-oriented mutual funds which track the overnight rate as the benchmark. They are traded on BSE and NSE just like equity shares — investors can buy and sell the units during market hours on working days.

Currently, there are two liquid ETFs available in India: Reliance Liquid BeES and DSPBR Liquid ETF. Reliance Liquid BeES has been one of the top actively traded ETFs in India, and has had a strong track record since July 2003; while DSPBR Liquid ETF has a history of less than a year.

Putting idle cash to work

Liquid ETFs are mainly suited for capital-market investors including traders who wish to park idle cash in a way that ensures easy liquidity and better returns than a regular account. When an investor sells equity shares in the exchange, he can simultaneously instruct the broker to purchase the units of a liquid ETF for an equal amount.

This helps the investor earn above-average returns till the proceeds comes into his trading account. Currently, the settlement happens in the cash market in (T+) 2 days. On the settlement date, the units of the liquid ETF are credited to the demat account. The investor can continue holding the investment in the liquid ETFs till he gets a new opportunity to deploy the money.

Similarly, investors waiting to buy opportunities in the market can park their idle money in liquid ETFs till the opportunities arise. The investor can call the broker and instruct his to simultaneously sell the units of the liquid ETF and buy the stocks.

Units of liquid ETFs can also be used as a cash-equivalent margin for the derivatives segment with a 10 per cent haircut.

Operational angle

Both the ETFs offer only one plan — daily dividend — which is compulsorily reinvested into the scheme. So, the returns accrue to the investors in the form of a daily dividend, which is re-invested into the scheme after deducting the dividend distribution tax (29.12 per cent).

The funds constantly endeavour to keep the daily NAV at ₹1,000.

Interestingly, most broking firms, except the ones that have a bank as their parent company, charge no brokerage for transacting in liquid ETFs. They benefit indirectly as the amount does not go out of their system. There are no custodian and transaction charges, resulting in a low cost of purchase.

The units arising out of dividend reinvestment result in fractional units. As the minimum trading lot on the exchanges is one unit, the fund houses arrange for an exit option through depository participants (DPs); for availing that service, the investor has to fill up an off-market transfer slip and submit it to a DP.

Fairly ample liquidity

Liquidity has not been a constraint in Reliance Liquid BeES, which is one of the largest traded ETFs in India, with a daily average volume of ₹92 crore on NSE in the last two years. The daily average number of trades in Reliance BeEs in the last two years has been 3,150.

Both the liquid ETFs follow Nifty 1D Rate Index as their benchmark, representing the returns generated by market participants lending in the overnight market. The index uses the Collateralised Borrowing and Lending Obligation (CBLO) overnight rate.

Currently, the weighted average rate of CBLO is 6.11 per cent, and it has hovered at 4.3-6.3 per cent in the past one year. Hence, the returns from these ETFs are closer to these rates.

Calculations shows that the per-day post-tax return generated by these liquid ETFs for an investment of ₹1 lakh made by the retail investor is ₹11-13. This would be higher than what investors can get from savings bank accounts on a post-tax basis.

High charges

The expense ratio of both the ETFs is around 60bps, which is higher than the average expense ratio of regular liquid funds. Second, the dividend distribution tax charged eats into the returns. Third, the brokers with banks as the parent company normally charge brokerage in liquid ETFs, which in turn reduces the return from the liquid ETFs.

One cannot compare the performance of liquid ETFs with liquid mutual funds or bank FDs as they are operated for different purposes, and hence have separate mandates.

Active retail investors, including traders, can consider this investment option to park their idle money for the short run, preferably for a period of up to one month.

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