‘Investors can consider liquid ETFs for parking idle funds’

Very often investors wait on the sidelines for the market outlook to improve before deploying their hard earned money. In the interim, the money is left idling. In another scenario, if one receives a lump sum payment, the money is temporarily parked before taking a final call on how to invest the money. Similar is the case of an emergency fund, where money is kept aside, most often, in a traditional investment option, given the need to access these funds at a short notice. In each of the instances, instead of letting the money sit idle (a few days or weeks), investors can consider parking it in a Liquid ETF (Exchange Traded Fund).

What are Liquid ETFs?

Liquid ETFs are highly liquid and short-term financial instruments. They invest in very short maturity instruments such as money market instruments and overnight low-risk securities. As a result, these instruments do not face interest rate or credit related risks. Hence, they are relatively safe and offer a high degree of liquidity, making it a suitable offering to park surplus funds for a short duration and earn a return on it. Another factor which works well for liquid ETF is the liquidity aspect. The units of liquid ETF can be bought or sold just like a stock from the exchanges. The dividends on these funds which is issued on a daily basis, gets reinvested, and fractional units are generated. Once sold, the proceeds are transferred to a person’s demat account on a T+1day basis. In effect, an investor gets an instrument which provides a good mix of liquidity and returns.

When it comes to expenses attached, liquid ETFs tend to have a relatively low expense ratio. This is because these instruments carry no securities transaction tax (STT) or custodian charges. For example, ICICI Prudential Liquid ETF has an expense ratio at 0.25%. As of May 31, 2023, the three and six-month return of ICICI Prudential S&P BSE Liquid Rate ETF was 6.3% and 6.2% respectively.

Ways to Utilise Liquid ETF

If you are an investor looking to make a staggered investment, you may consider parking the corpus in a liquid ETF and then deploying the same in a phased manner or as and when the opportunity arises. In this manner, one gets to gain even during the waiting period through liquid ETF. If you are a trader, instead of letting the money idle in a trading account with the broker, park it in a liquid ETF. You may do so right at the time of exiting a position by instructing the broker to buy liquid ETF units with the proceeds of the trade. In the future, when the next trade needs to be executed, the broker can liquidate the units of Liquid ETF to fund that purchase. Thus liquid ETFs generate returns right from the date of settlement till the date of liquidation, allowing the trader to optimise capital to generate further profits while benefiting from liquidity. Many brokers also accept liquid ETFs as a cash-equivalent margin for derivative trades. Also, one can pledge units of liquid ETF for a trade.To conclude, investors can consider liquid ETFs for parking idle funds kept aside to meet short term funding requirements or trading requirements.

(Chintan Haria is Head Investment Strategy at ICICI Prudential AMC.)