Level | Advanced

What are Liquid ETFs?

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Key Takeaways

  • Liquid ETFs (Exchange Traded Fund) are mutual funds 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.
  • 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.
  • By parking funds in liquid ETFs, investors can earn returns on idle funds while also remaining liquid to benefit from attractive investment opportunities.
  • Advantages: Potentially more returns (as compared to money idle in the margin account or a saving account), high liquidity, convenience (since you no longer need to make unnecessary transactions or move money between your trading and bank account) and the ability to use these investments as margin money.
  • When buying liquid ETFs, be aware that fractional units can be only sold back to the issuing MF and that there could be brokerage charges while transacting.
  • 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, and High Net Worth Individuals (HNIs).