Market pulse

Authored by Shrey Jain, Founder and CEO of SAS Online

While trading in stocks and derivatives, many traders face an operational challenge – maintaining the right amount of money in the broking account. Though in the digital world the movement of money has become smooth – be it from bank account to broking account or vice versa, traders need to maintain a fine balance.

Money kept with stock broker earns little. Though saving bank accounts pay some interest, it is unattractive. Also, each time one wants to trade, she has to start with transfer of money to the broking account before placing an order. In this context, savvy traders park their funds into liquid Exchange Traded Funds (ETFs) which offer attractive returns and also offer all the firepower to trade seamlessly. Let us understand this in detail:

A liquid ETF invests in debt instruments which mature overnight. Its units are listed on a stock exchange and trade at the face value. Gains accrued on a liquid ETF are either paid as dividend daily or credited as factional units in an investor’s demat account. These gains can be realised either by selling such units on the stock exchange or to the fund house.

Now, let us understand these schemes from the standpoint of risks. Liquid ETFs carry no credit risk as they invest in tri-party repo on government securities and treasury bills. They provide returns in line with money market interest rates, which at present are attractive. Also, since money from liquid ETFs is redeployed everyday, there is no duration risk in them. Hence, investors need not worry about the possibility of losses triggering from volatility in bond prices as interest rates move up or down.

Fund houses such as Aditya Birla Sun Life, DSP, HDFC, ICICI Prudential, Kotak, Mirae and Nippon India offer such schemes. The oldest among these is Nippon India ETF Nifty 1D Rate Liquid BeES. It is also the largest scheme in the industry with a corpus of Rs 9,805 crore and has offered 5.61% returns in the past one year ended October 22, 2023, according to Value Research. At current money market yields, it makes sense to invest in liquid ETFs rather than keeping the money in a bank account.

Even transacting in liquid ETFs is seamless. They can be bought and sold, like any other stock or derivative instrument on the stock exchange. A fund house credits the money on the day following the day on which units are sold on a stock exchange. Raising money against these units is also easy. Most leading stock brokers do not charge brokerage for transacting in units of these schemes and offer margin as high as 90% to traders.

Given these facts, investing in liquid ETFs can be very attractive for traders planning for a short break of a week or so from trading. It saves traders all costs associated with transfer of money from a saving bank account to a broking account and vice versa. For savvy traders saving on such operational costs is an advantage as they save on time. This time they can utilise in identifying new trades in the markets. Hence, to a great extent, investment in a liquid ETF not only provides peace of mind but also optimises returns for traders.

Article is also published in FINANCIAL EXPRESS - Click here