Mutual fund investors have a plethora of alternatives to choose from. From multi cap to debt funds, hybrid funds and exchange traded funds – there are options galore for investors across the spectrum.
One of the not-so-popular investment options is liquid ETFs (exchange traded funds) that we are set to give the details of.
Liquid ETFs are highly liquid and short-term financial instruments. The invest in very short maturity instruments such as money market instruments, overnight low-risk securities. Just as other ETFs, they are traded on stock markets. They can be used for trade margin requirements. Some of these instruments include DSP Nifty 1D Rate liquid ETF, Nippon India Liquid Bees ETF and ICICI Pru S&P BSE Liquid Rate ETF.
The dividends on these funds are credited on a daily basis, which are reinvested in the form of additional units credited in the demat account once in 30 days.
Since they are liquid, most brokers accept these units for extending margins against them.
Liquid exchange traded funds (ETFs) are a good investment instrument to park funds. They can be liquidated anytime in the markets. The cost of transaction is economical since these funds carry no securities transaction tax (STT). These units can be bought easily from one’s trading account.
As mentioned earlier, they can be used for margin requirements for derivative trading upon pledging with broker. Besides, these funds have lower expense ratios.
Raising overall returns
Investors can look at these funds to enhance their overall returns without compromising on their trading requirements.
These funds are traded in the secondary markets and have high liquidity and can therefore, be considered equivalent to cash.
After the units are credited to your account, daily dividends are credited in the form of additional units. So, one can use them for not only generating additional income but also as collateral with a broker in case of fund requirement to carry out derivative trade.
Other things to know
However, it is vital to mention that the units credited are too small to be sold in the open market and consequently, the fund house tends to buy back these tiny units from the investors. Also, investors must be apprised of the fact that while no securities transactions tax (STT) is levied, brokerage is still applicable.
Another thing that must be factored into before buying these units is that the dividends received is chargeable under income tax law. Upon selling the units, any income earned is taxed as capital gains.
Since these are debt funds, they are taxed at the rate of 15 percent i.e., applicable in case of short-term capital gains if sold after holding for lower than 36 months. Else, they are taxed at the rate of 20 percent along with indexation benefits.
So, one should bear in mind these things before foraying into this category of exchange traded funds (ETFs).