Exchange Traded Funds: Optimise returns on your portfolio with liquid ETFs

financialexpress.com:

While trading in stocks and derivatives, many traders face an operational challenge – maintaining the right amount of money in the broking account. Though in the digital world the movement of money has become smooth – be it from bank account to broking account or vice versa, traders need to maintain a fine balance.

Money kept with stock broker earns little. Though saving bank accounts pay some interest, it is unattractive. Also, each time one wants to trade, she has to start with transfer of money to the broking account before placing an order. In this context, savvy traders park their funds into liquid Exchange Traded Funds (ETFs) which offer attractive returns and also offer all the firepower to trade seamlessly. Let us understand this in detail:

A liquid ETF invests in debt instruments which mature overnight. Its units are listed on a stock exchange and trade at the face value. Gains accrued on a liquid ETF are either paid as dividend daily or credited as factional units in an investor’s demat account. These gains can be realised either by selling such units on the stock exchange or to the fund house.

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Now, let us understand these schemes from the standpoint of risks. Liquid ETFs carry no credit risk as they invest in tri-party repo on government securities and treasury bills. They provide returns in line with money market interest rates, which at present are attractive. Also, since money from liquid ETFs is redeployed everyday, there is no duration risk in them. Hence, investors need not worry about the possibility of losses triggering from volatility in bond prices as interest rates move up or down.

A liquid ETF may seem similar to an