Many of the traders frequently buy & sell on stock exchanges and keep margin money with their stock brokers.
When you buy any securities / stocks on exchanges you need to make payment by T+2 & if you have sold any securities / stocks you get the payment by T+2. To avoid operational hassle of every time issuing cheque or making online payment to broker, many traders keep some margin with their brokers. Further, it is mandatory for the broker to settle clients account on T+2 in case client has NOT provided “Running Account Authorisation”. Even if running account authorisation is given, broker has to settle the account at least once in a quarter.
If money is kept in margin account maintained with the broker, you do not earn anything on that money. Also, every time you buy or sell securities / stocks you need to do operational processes like issuing cheques or marking online payments.
Liquid ETF is convenient way to handle idle margin money kept with broker & minimise operational work.
What is Liquid ETF: Liquid ETF is noting but a normal Liquid Mutual Fund scheme traded on the NSE & BSE. In Liquid Funds money is generally invested in Collateralise Borrowing and Lending Obligation (CBLO), Treasury Bills, Certificates of Deposits (CDs), Commercial Papers (CPs) etc. As per the guideline the maturity of these securities has to be less than 91 days. Due to this comparatively Liquid Funds are less volatile. However capital is not 100% protected. There are instances in past where Liquid Funds have given negative returns.
How to use Liquid ETF:
Suppose you have margin money of Rs. 1 Lakh with your broker. With that money buy Liquid ETF on the exchange. Whenever you want to buy any securities / stock or take new position, sell Liquid ETF of that much amount and create new position. When you unwind the position or sell any securities / stock, against that again buy Liquid ETF. Amount needs to be paid against buy order will get settled against sell order of Liquid ETF, so you need not to worry about issuing cheque or marking online payment to your broker. If you have sold and stocks and against that if you have bought Liquid ETF on T+2, i.e. on settlement date instated of getting money in your margin account, Liquid ETF will be credited to your demat account. For whatever period you hold Liquid ETFs you get return on it.
Cost: When you trade on exchange you pay trading cost. As Liquid ETF is debt fund STT is not applicable on buying or selling of ETF units. However, there are other cost which needs to be paid. On transaction value of Rs. 1 Crore there will be round trip cost of approximately Rs. 3,000 If we consider annual average return of 5% on Liquid ETF, you will get approximately Rs. 1,370 daily. Thus to recover transaction cost of Rs. 3,000 you have to hold the Liquid ETF in your demat account at-least for 3 days. Also note that, Liquid ETF will start earning return from the day it is credited to demat account up to day on which units are debited from demat account. Generally, two days are required as per normal settlement from the day units are bought on the exchange to be credited in demat account. So effectively you need to should not sell ETF units before minimum of 6 days to recover trading costs. As the return on Liquid ETF is very less, generally brokers waive off the brokerage charges. Confirm with your about the same broker before you buy ETF units on exchange. DO NOT BUY IF BROKERAGE IS CHARGED.
Liquidity on NSE & BSE: Liquid ETF is the most liquid ETF on NSE & BSE. Further, unlike other ETFs generally in case of Liquid ETF, buy / sell quotes are provided by the AMC itself at very narrow margin. If you look at NSE / BSE Liquid ETF, you will see at most of the time bulk order are filled at Rs. 1000.01 & Rs. 999.99 ALWAYS PLACE LIMIT ORDER WHILE BUYING OR SELLING LIQUID ETF ON NSE OR BSE. On an average there is turnover of around Rs. 100 Crores on NSE + BSE, so it is very easy to buy or sell required quantities of Liquid ETF on NSE & BSE.
Feel free to comment below if you have any specific query.
Let your idle margin money earn ideally!