Liquid Exchange Traded Funds (Liquid ETFs) are emerging as a preferred parking ground for equity market investors to park their short-term surplus. Designed to combine liquidity with efficient cash management, these instruments are gaining traction among active traders, institutions, and treasury desks.
At present, 13 fund houses manage 18 liquid ETFs in the market, available in both growth and dividend options. These ETFs are actively traded on both NSE and BSE. Over the last three months, they have clocked an average daily traded volume of nearly ₹803 crore across exchanges.
In structure, liquid ETFs are passively managed debt-oriented mutual funds that track the overnight rate. Investors can buy or sell units during trading hours on working days, much like equity ETFs. The returns tend to move in line with the RBI repo rate, thereby providing a predictable return stream.
Why they make sense
For active market participants, liquid ETFs provide a clear advantage over leaving cash idle. Funds sitting in a broker’s account earn nothing, while traditional savings accounts offer 2.5–3 per cent annually. Liquid ETFs, on the other hand, have delivered 3–6 per cent, which translates into incremental gains on idle cash.
There are two benefits that make these ETFs useful.
The first is the ability to instantly deploy proceeds from equity sales. When shares are sold, brokers allow clients to channel the full proceeds simultaneously into liquid ETF units of equivalent value. While many brokers may apply a haircut, some allow 100 per cent deployment. With equities settling on a T+1 basis, ETF units get credited to the demat on settlement. Investors can hold them until the next opportunity arises, earning returns in the interim. Investors can return to equities by placing a simultaneous redemption instruction for their liquid ETFs with the broker.
The second is their role as collateral in futures and options (F&O). Units of liquid ETFs can be pledged as cash-equivalent margin. Exchanges recognise this collateral as equivalent to cash, subject to a haircut, which enhances leverage efficiency. Brokers such as Zerodha and Groww accept pledges at 90–95 per cent of value, compared with 100 per cent for pure cash. This arrangement lets traders maintain positions while earning daily ETF yields (approximately 0.01-0.02 per cent daily), optimising capital utilisation and reducing funding costs by 1-2 per cent annually.
Structure
Liquid ETFs are issued in two variants — daily dividend and growth. In the dividend option, returns are distributed either as cash or as additional ETF units, credited periodically. Nippon India Liquid BeES ETF and DSP Liquid ETF, for example, credit additional units weekly, while ICICI Liquid ETF pays cash dividends directly into investors’ bank accounts. However, dividend payouts above ₹10,000 in a financial year attract TDS.
The growth option, introduced more recently, reinvests back into the scheme. This makes tracking returns easier, avoids the inconvenience of handling small dividend units, and aligns with the structure followed by equity and debt ETFs. Both options, however, are taxed under normal slab rates, whether the income is classified as dividend or capital gains.
Return profile
These ETFs use indices such as the Nifty 1D Rate Index, S&P BSE Liquid Rate Index, or CRISIL Liquid Overnight Index as benchmarks. Each of these indices is based on the “Triparty Repo Dealing System (TREPs)” overnight rate, one of the most secure and liquid instruments in money markets. In TREPs, the Clearing Corporation of India acts as the intermediary, managing collateral and ensuring smooth settlement.
Yields from TREPs typically align with the RBI repo rate and prevailing short-term money market rates. As a result, liquid ETFs deliver modest yet steady returns. Over the last five years, the one-year annualised rolling returns of this category have ranged between 2.5 per cent and 6.3 per cent. This comfortably beats the 2.5–3 per cent on most bank savings accounts.
On costs, liquid ETFs charge an expense ratio between 0.15 per cent and 0.69 per cent, with higher ratios seen in daily dividend variants due to infrastructure and processing needs. Given the relatively low return profile, many brokers waive off brokerage and demat charges. Moreover, there is no STT, custodian fee, or transaction tax, which keeps the total cost of ownership low.
Nippon India ETF Nifty 1D Rate Liquid BeES, Zerodha Nifty 1D Rate Liquid ETF, and ICICI Prudential BSE Liquid Rate ETF are the most actively traded ETFs on the NSE, with average daily volumes of ₹336 crore, ₹101 crore, and ₹73 crore, respectively, over the last three months.
Liquid ETFs cannot be directly compared with liquid or overnight mutual funds, or even bank fixed deposits, as each serves a distinct purpose.
Published on September 13, 2025