When a stock market investor liquidates or sells off his investment, he faces two issues before he reinvests his money into a new stock.
Let's say that you invest in the stock market. Over the past few months, the value of your investment in Stock A increased and you are now selling it to earn profits. You place your sell order on day 1. The stock gets debited from your Demat account on day 2, and you receive your sell proceeds in your margin account on day 3.
You can now keep the money in your margin account until you find a new investment or initiate a payout to your bank account.
Now, as a stock market investor, your first dilemma will be that this money will stay idle in your margin account and not earn any interest and therefore not give you any returns. And the second is that you will also have to spend a considerable amount of time and energy in transferring money between your trading account and your bank account.
Is there one simple solution that can tackle both of these issues? Of course there is!
Introducing, Liquid ETFs. A liquid ETF, or Exchange Traded Fund, as the name suggests, is a mutual fund whose units are traded on the stock exchange. They invest in low risk overnight securities like Collateralized Borrowing and Lending Obligations (CBLO), Repo and Reverse Repo securities.
What are these, you ask?
Well, CBLO is a money market instrument that enables entities to borrow and lend against sovereign collateral security. The maturity ranges from 1 day to 90 days and can also be made available upto 1 year. Central Government securities including T-bills are eligible securities that can be used as collateral for borrowing through CBLO..
Repo refers to repurchase agreements in the form of short-term borrowing for dealers in government securities. The dealer sells the government securities to investors, usually on an overnight basis, and buys them back the following day.
For the party selling the security and agreeing to repurchase it in the future, it is a repo. And For the party buying the security and agreeing to sell in the future, it is a reverse repurchase agreement, or Reverse Repo.
Repos are typically used to raise short-term capital.
Liquid ETFs pay dividends on a daily basis, which is then reinvested into the fund. The aim of a liquid ETF is usually to provide an income commensurate with low risk, but at the same time, providing a high level of liquidity.
It is this high liquidity which makes Liquid ETFs the perfect solution to your conundrum.
When you place your sell order on the Day 1, you can simultaneously buy Liquid ETF units on the same day. On Day 2, your stocks are debited from your demat account and on Day 3 the Liquid ETFs will be credited to your demat account and you will start earning returns in the form of daily dividends. So no money will sit idle. This basically allows investors in the liquid ETF to start receiving returns on their investments from the date of settlement of their trade.
And since liquid ETFs are highly liquid, you could conveniently sell units easily to invest back into the stock market as and when an opportunity arises.
The advantages of Liquid ETFs are:
The things you need to be careful about when buying Liquid ETFs are as follows:
Liquid ETFs are particularly suitable for large retail traders and investors, Portfolio Management Services (PMS) providers, Futures & Options (F&O) brokers and institutions which invest directly in equities. These funds are also suited to the needs of High Net Worth Individuals (HNIs) as many times, these investors may have funds lying idle either in a trading account or they may be maintaining margin money with their brokers on which no returns are earned. By parking funds in liquid ETFs, investors can earn returns on idle funds while also remaining liquid to benefit from attractive investment opportunities.
To conclude, Liquid ETFs can help make trading more profitable if used in the right manner. And that too, in a much easier and convenient way!
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