Investors generally concentrate a lot on the returns from their investments, but overlook certain other aspects which can help deploy surplus funds better and earn a few extra bucks. One such case is the trading account balance. Many investors have funds in their trading accounts (either by way of gains on sale of shares or by way of capital addition) to take care of margin requirements, especially for derivatives. In such cases, we find that the funds lying in the trading account are idle. What if there is a way to earn interest on this otherwise idle money, and it is also available for deployment in case of any investment opportunity? Enter Liquid BeES/Liquid ETFs.

What are Liquid ETFs?

Liquid BeES/Liquid ETFs are Exchange Traded funds that are traded in the secondary market like shares. These funds invest in money market instruments, call money, overnight low-risk securities and ensure lower risk and liquidity.  The returns on Liquid ETFs are in the range of 3-4 per cent annually and the dividends are credited on a daily basis, which are reinvested in the form of additional units credited in the demat account once in 30 days. It must be noted that, given their liquidity, most brokers accept these units as cash equivalents and extend margins against them.

Advantages of Liquid ETFs

Liquid ETFs are a very good avenue to park funds. They can be liquidated anytime in the markets. In addition, these funds provide 3-4 per cent return annually, as mentioned above. Liquid ETF attracts brokerage but carries no STT (Securities Transaction Tax), custodian and transaction charges. Thus, the cost of transaction is relatively economical. The units of the funds can be bought easily from one’s trading account. Liquid ETFs can take care of margin requirements for derivative trading (especially options trading which requires margin while writing) when it is pledged with your broker.

Liquid ETFs have lower expense ratios and therefore are relatively cheaper. For example, the Nippon India Nifty 1 Day Rate Liquid BeES ETF as well as DSP NIFTY 1D Rate Liquid ETF chanrge an expense ratio of 0.64 to 0.67 per cent.

Optimising usage

Investors can look at these funds to enhance their overall returns without compromising on their trading requirements. These funds, being traded in the secondary markets, have high liquidity and can therefore be converted into cash almost instantaneously. The settlement process in the market is T+2 days and therefore the units will be credited on the day of settlement. Once the units are credited daily dividends will be credited in the form of additional units and therefore generate additional income when idle and can be pledged when funds are required for derivative trades.

Liquid ETFs attract 8-12 per cent haircut (on Zerodha, for example) on pledging and the margin so received is considered as 100 per cent cash equivalents which fulfils the margin requirements for derivative trading.

Let us consider an example.

Jaidev has ₹ 1,00,000 in his demat account and is looking for an opportunity to invest. Instead of leaving the cash idle in the trading account, he buys liquid ETFs worth that amount and gets daily dividend in the form of additional units. A few days later, he decides to sell Nifty 17800 CE (month end expiry) and the margin requirement is ₹1,05,552. Jaidev now pledges his liquid fund units and gets margin worth ₹92,000 after taking a haircut of 8 per cent and remaining ₹13,000 is additionally forked out. Now, Jaidev closes the trade after 12 days and makes a profit of ₹11,090 and releases his units from pledge.

Things to look out for

Since the units also include the daily dividends, it so happens that there are also fractional units which cannot be sold in the open markets. Generally, the issuing fund house buys back those fractional units by an off-market transfer mechanism. Another aspect investors must keep in mind is the brokerage charge applicable, though liquid ETFs are not charged any STT or transaction charges. Investors must look at the taxation angle also, the dividends received will be taxed as Income from other sources at the applicable slab rate while the income on transfer of Liquid ETFs will be taxed as Capital gains. Liquid ETFs being basically debt funds, if the holding period is less than 36 months, it will be taxed as short term capital gains at 15 per cent (or applicable rates); else it will be taxed as long term capital gains at 20 per cent with indexation benefit. Investors must take these aspects into consideration before investing in liquid ETFs.

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