What is a Liquid ETF/Liqudbees and how does it work?
Liquid ETF or a Liquid Exchange Traded Fund (ETF) is designed to provide you a low-risk return and high liquidity. It trades on the exchanges (NSE and BSE) just like a stock.
Note: Zerodha AMC has a new Liquid ETF coming soon. You can check out the details here: Zerodha Nifty 1D Rate Liquid ETF
How does a LiqudETF/LiquidBees work?
The way this instrument works is actually quite interesting. The price of the ETF stays constant at Rs 1000 and the returns you earn are daily dividends in the form of units which are again re-invested in the ETF. These units (your returns) are credited to your demat account on a weekly basis.
Unlike other liquid ETFs, the returns in the Zerodha ETF are added to the NAV and no dividends are paid. This makes it easy to track the ETF returns and is also relatively tax-efficient.
Just to reiterate - the dividends are calculated daily, reinvested, and credited once a month to your demat account.
What’s the difference between Liqudbees and a LiqudETF?
Nippon Mutual Fund owns and operates Liqudbees and it is the symbol of their Liquid ETF. Given that it was the only liquid ETF in India up until recently, LIQUDBEES became synonymous with liquid ETFs.
There are 3 Liquid ETFs available currently and they all work the same way:
LIQUDBEES - is issued and administered by Nippon Mutual Fund.
LIQUIDETF - is issued and administered by DSP Mutual Fund.
ICICILQ - is issued and administered by ICICI Mutual Fund.
How can I buy a Liquid ETF/Liqudbees?
A Liquid ETF trades on the stock exchanges just like a stock. You can login to your trading account, search for “LIQUID” and you’ll see two ETFs - LIQUIDBEES by Nippon and LIQUIDETF by DSP.
What’s the settlement cycle for Liquid ETFs?
Same as stocks i.e. T+1.
What can I use Liquid ETFs for?
Liquid ETFs are actually a convenient avenue to park surplus funds in your account. You can pledge them anytime and take a trade immediately.
How does the pledging of Liquid ETFs work?
Liquid ETFs are marginable securities. Assuming that you are waiting for a trade and have parked funds in a Liquid ETF, what you can do is pledge them back with your broker and use the margin to take a trade. You don’t even have to sell them and this makes them an extremely convenient tool for cash management.
How much margin do I get for pledging Liquid ETFs/Liqudbees?
The collateral margin received from Liquid ETFs are considered as cash equivalent by the exchanges.
Meaning, if you pledge 1 lakh worth of Liqudbees, you get a collateral margin of 90 thousand that you can use to take trades. You can only use the collateral margin only for F&O trades.
10% is the haircut, which is to account for any adverse movements in the underlying.
How much have Liquid ETFs returned historically?
Here’s a screenshot depicting the returns:
The screenshot says 6% odd but why are my actual returns around 3.5%?
Good question. The returns in Liquid ETFs are in the form of dividends they are subject to a Dividend Distribution Tax. Before Budget 2020, a flat DDT of 28.84% was applicable. Post the budget, dividends are now taxable in the hands of the investors at their income tax slab rate. Plus a TDS of 10% will be applicable on mutual fund/ETF dividends once the dividends cross Rs 5000.
So, the returns of Liqudibees will now be similar to Overnight mutual funds or the RBI repo rate and you’ll have to pay DDT on the units you receive as dividends as per your income tax slab.
You can check out the dividend calculator to calculate your effective returns.
I have received dividends but I don’t see them in my holdings?
Fractional units aren’t shown in your holdings, they will only be shown once your units aggregate to 1. Meaning, only whole units are shown in your holdings.
Until then, you can register on CDSL easi and check your holdings statement.
In that case, how can I sell my fractional units?
Process largely remains the same, but here’s the process for Nippon Liqudbees.
Do dividends accrue on weekends?
Yes, they do.
What securities do Liquid ETFs invest in and are they safe?
Liquid ETFs invest in Tri-Party REPO, Repo, Government Securities, Reverse Repos, and other similar overnight instruments. Liquid ETFs have so far stuck to overnight lending which as risk-free as it can be. About 99% of their allocation is towards tri-part repo which is fully collateralized. Meaning, assume that some borrows from an AMC defaults, since the money is fully collateralized, there is no default risk.
Also, since they only hold overnight securities, the interest rate risk also as good as zero.
What are the charges applicable for buying selling these ETFs?
At Zerodha the brokerage for delivery is 0 and STT isn’t applicable but all other charges are applicable.
A DP charge of Rs 8 will be applicable on selling.
Can I trade intrady in Liqquid ETFs?
Yes, you can but you won’t earn anything and your broker will be very thankful to you. 
I’d highly recommend watching this videos which explain how these ETFs work what kind of securities these ETFs invest in.
