Have excess funds in your account? Park it in liquid ETF

By Angel One | Published on 23rd July 2021 | 121

Have excess funds in your account? Park it in liquid ETF

As it happens, sometimes you have some excess funds lying in your brokerage account. But instead of letting it sit idle, park your surplus fund with liquid ETFs. These are highly liquid funds that you can pledge anytime or trade immediately.

It is common for equity market investors and traders to make continuous profits from transactions. A better alternative is to invest in ETFs to earn extra profit from the excess fund. These funds are available for trading in the BSE and NSE, where one can buy or sell them quickly during the market hours on any trading day.

The popularity of ETFs has grown significantly in recent years. But if you are ignorant of the many benefits of investing in ETFs or exchange-traded funds (because these can be traded in the exchange), this article will help you brush your knowledge.  

ETFs are favoured for their high liquidity 

ETFs are investments that don’t demand long term commitment. One of their primary attractions is high liquidity. These funds are listed in the stock exchange like general stocks and traded during the day. The ETF price changes as the intraday rates of the underlying assets change. ETF investors know in a moment what they have paid and what they will receive at selling. 

It makes it easier for investors to move money from one asset to another, build strategies around their investment, and manage intraday portfolios. By investing in ETFs, investors can easily invest in a diversified portfolio made of bonds, stocks, or commodities and move allocation around at convenience. 

Easy fund management 

ETFs are passively managed funds that follow the overnight rate of a benchmark. These are designed to offer low-risk returns and high liquidity. Investors simultaneously invest in an ETF when they sell equities from their portfolio. Most brokers will allow investors to reinvest 100 per cent of the proceeds into an ETF tool on the same day. The market currently follows a settlement cycle of T+2 days, meaning the ETF units will get credited to investors’ accounts on the settlement day. 

ETF offers double benefits. Individual investors can continue holding their investment until they find a better alternative to move their funds. And secondly, they can forward ETFs as a pledge against cash margin while investing in the derivative segment. Almost all brokerages will accept ETFs as cash margins for investing in the derivative market after applying a haircut. 

Portfolio diversification and risk management

ETFs offer portfolio diversification by allowing investment in various stocks, sectors, styles, industry and country categories. They provide investors easy exposure into desired market segments. 

ETFs are now available in all major asset classes, making them a versatile investment option. Moreover, investors can choose to trade ETFs during market volatility or continue to invest based on their financial plans to earn profits from high yielding assets. 

Lower costs 

Historically, costs have a significant role to play in predicting future returns. Typically, lower costs mean higher returns. 

Operational expenses are an integral part of the structured investment, irrespective of their types. These costs typically include portfolio management fees, custody fees, administrative expenses, marketing costs, and distribution fees. Compared to open-ended mutual funds, the cost of investing in ETFs is less. 

The lower costs are a result of the non-involvement of fund managers in managing the investment. ETFs also have lower expenses in the sections of monthly statements, notifications, and transfers. Unlike open-ended funds, brokerages don’t need to send regular updates to investors. The information goes only to the direct owners of the creation unit. 

Tax advantages 

Because of the structural differences, mutual funds incur more tax than ETFs. Since ETFs have a lower capital gain, the rate of capital gain tax applied to it is also less compared to mutual fund investment.  

Returns 

Liquid ETFs have only one dividend option. The daily dividend earned compulsorily get reinvested into an ETF. Some ETF funds will credit the bonus into investors’ accounts weekly or monthly, depending on the nature of their schemes. Since returns are low, brokerages often waive off brokerage fees and DP charges on these funds. Further, there is no securities transaction tax (STT), custodian and transaction charges apply to the ETF, making it even low cost.   

The bottom line 

If you wonder what to do with the excess investable fund in your account, try investing through liquid ETFs. These funds will help you generate low-risk returns while maintaining higher liquidity on your investment.