Everything you need to know about Liquid Exchange-Traded Funds

Liquid-exchange traded funds (ETFs) are passively managed debt mutual funds that invest in overnight securities. These funds invest in low-risk overnight securities such as collateralised borrowing and lending obligations (CBLO), repo and reverse repo securities. The objective of liquid ETFs is to enhance returns while reducing price risk. 

These ETFs trade on the stock exchanges similar to company stock. They are listed on the cash market segment of the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) and, therefore, it is imperative to have a demat (dematerialised) account.

The trading price of liquid ETFs is always Rs 1,000. The dividends on liquid ETFs are credited on a daily basis, which is reinvested in the form of additional units credited in the demat account once in 30 days.

As per the markets regulator the Securities and Exchange Board of India (SEBI) norms liquid funds are mandated to invest in debt and money market securities with maturities of up to 91 days. The returns generated from liquid ETFs are relatively quite stable considering such short-term debt securities are less likely to face price fluctuations as compared to those with a long-term holding period. The dividends from liquid ETFs are taxable as per the slab rate applicable to the investor.

Liquid ETFs are suitable for investors who wish to park their surplus funds in a trading account. In addition, the cost associated with liquid ETFs is minimal. Also, it is an easier and more convenient route to take care of the idle cash lying in a margin account. Individual retail investors can also look forward to investing in liquid ETFs as a suitable short-term investment option.

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