What are they
Liquid ETFs are a specific category of ETFs that invest primarily in overnight security i.e. Tri-Party Repo (TREP). The primary objective of liquid ETFs is to provide a high level of liquidity for investors.
Liquid ETFs track short-term debt instruments through indices such as BSE Liquid Rate Index. The BSE Liquid Rate Index, on the other hand, tracks returns from daily rolling deposits at the Tri-Party Repo (TREP) rate. The Nifty 1D Rate Index measures returns generated by market participants lending in the overnight market, using the CBLO rate for index values. Fund managers ensure liquidity and stability by investing in low-risk overnight instruments, providing a safe haven for surplus funds.
Benefits
Liquid ETFs can be bought and sold easily on the stock exchange during trading hours, providing greater liquidity compared to other instruments like fixed deposits. Investors benefit from instant access to their funds, making liquid ETFs an ideal option for those who want to maintain liquidity for future opportunities.
The short-term nature further reduces interest rate risk, making liquid ETFs a stable option for conservative investors.
With lower expense ratios, liquid ETFs are a cost-effective investment option. As they are passively managed, the reduced costs translate into better returns for investors, especially over the short term.Investors can buy as little as one unit of a liquid ETF, making it an accessible option for all types of investors, whether retail traders or institutional players. This flexibility is particularly appealing for those looking to invest idle cash or manage margin money in a trading account.Liquid ETFs act as a strategic cash management tool for investors looking to park funds temporarily. For instance, if you are awaiting a good equity investment opportunity or need to hold funds between trades, liquid ETFs allow you to earn returns while maintaining liquidity.
By adding liquid ETFs to a portfolio, investors can reduce overall risk. These ETFs tend to have low correlation with equities, helping to balance the volatility of a more aggressive portfolio.
To invest in liquid ETFs, investors must have a demat and trading account. This account allows them to trade ETFs in real-time on the stock exchange.
Conclusion
Liquid ETFs offer a blend of liquidity, low risk, making them an attractive option for investors. Whether used for cash management or portfolio diversification, liquid ETFs can provide both capital preservation and margin management. Consider adding liquid ETFs to your portfolio to optimize returns while maintaining flexibility.
(The author is Principal Investment Strategist – ICICI Prudential Asset Management Company)
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)