Why in the news
Brokers increasingly steer clients into liquid ETFs for idle money. This lets funds stay inside the broker’s platform instead of being sent back to bank accounts at month-end, as rules otherwise require for unutilised funds.
Key facts
- Liquid ETF AUM: up 31% in a year, ₹17,200 crore to ₹23,550 crore.
- They are short-term debt instruments holding money market and overnight assets, with roughly 1-day maturity, listed on NSE and BSE.
- Daily returns are computed and reinvested as extra units, credited to the demat account every 30 days.
- Suited to people parking spare money briefly and wanting steady daily returns without long lock-in.
Pros and cons
| Advantages | Disadvantages |
|---|
| Returns start right after settlement, unlike idle margin or savings balances | Exposed to market risk despite stability aim |
| High liquidity and daily portfolio disclosure | Investor cannot choose underlying securities |
| No hopping funds between trading and bank accounts | |
| No STT; expense ratio generally below mutual funds | |
Taxation
- Sold within 1 year: short-term capital gains.
- Sold after 1 year: LTCG at 12.5%, with ₹1.25 lakh of gains exempt each financial year.
Liquid funds vs liquid ETFs
| Parameter | Liquid funds | Liquid ETFs |
|---|
| Liquidity | T+1 redemption; some instant | Intraday trading on exchanges |
| Suits | Beginners, traditional investors | Market-savvy investors |
| Cost | No brokerage; possible exit load | Brokerage on each trade |
| Expense ratio | Slightly higher | Lower |
| Access | Banks, AMCs, MF platforms | Demat and trading account needed |
| Choice | More options | Limited |
| Tax | Under 1 yr per slab; over 1 yr LTCG with indexation | Under 1 yr STCG; over 1 yr LTCG as for equity |
Points to check before investing
- Objective: short-term liquidity; horizon: days to months.
- Risk is low but not nil; prefer high credit quality holdings.
Exam angle
- Maturity of liquid ETFs: about 1 day.
- Exempt from Securities Transaction Tax.
- Needs a demat account.