Mirae Asset MF’s new ETF designed for stock market traders

ETF

Mirae Asset Mutual Fund’s new fund offer (NFO), Mirae Asset Nifty 1D Rate Liquid ETF (MN1D), will reopen for continuous subscription on July 28. It is an addition to the list of exchange traded funds (ETF) that allow investors to park funds for a very short term – say a day to a fortnight. Investors, however, can decide to remain invested longer.

Investors can choose between open-ended debt products such as overnight funds that can be used to park funds for a week or two; and liquid funds that can be used to park money for a month or so. However, these products - liquid ETF and open-ended debt products differ significantly at the operational level and from a usage point of view.

Where do they invest?

Like any other ETF that tracks Nifty 1D Rate Index, MN1D will also invest in tri-party repo on government securities or treasury bills or repo and reverse repo. There is little credit risk and interest rate risk, making it a safe place to park money. Since the money gets redeployed every day, investors can expect only money market returns. This works mostly like an open-ended overnight fund; the returns may be similar.

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According to Value Research, open-ended liquid funds have yielded returns of 6.42 percent while overnight funds have yielded returns of 6.11 percent for the year ending July 24, 2023. DSP Nifty 1D Rate Liquid ETF has given 6 percent returns whereas ICICI Prudential BSE Liquid Rate ETF has given 5.98 percent returns. The largest and oldest liquid ETF – Nippon India ETF Nifty 1D Rate Liquid BeES that manages assets worth Rs 7,929 crore, gave 5.44 percent.

Just to put things in context, overnight schemes of mutual funds also invest in instruments that mature in one day, typically tri-party repo on government securities or treasury bills. Liquid funds invest in securities that are going to mature in 91 days.

Where do they differ?

Investors can transact in units of ETFs on the stock exchanges using demat accounts whereas they invest in open-ended schemes through distributors or through AMC websites among other avenues. Let’s look at it in detail.

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When you buy an open-ended overnight fund, you transfer the money from your bank account to your MF’s account. Once the fund house receives your money, it allots you units. This is like buying any other MF scheme. When you sell units, money is credited to your bank account the following day.

In case of liquid ETFs, the units are bought by placing a buy order on the stock exchange. The seller is paid with the money kept with your broker. The units are credited on the following day to your demat account. If you are keen, then you can pledge such units held in your demat account to acquire margin for trading. When you sell units held in the demat account, the money is credited to your account held with the broker on the following day.

If the scheme has a dividend payout option, then the money is credited to your bank account, and if the dividend is compulsorily reinvested in the scheme, then such units allotted out of dividend reinvestment are added to the demat account of the investor. Since the investors cannot sell fractions on the stock exchange, if there are fractional units held by the investor, out of dividend reinvestments, then such units can be sold to the mutual fund house at regular intervals using platforms such as BSE STAR MF.

Differentiated audience

Liquid ETFs are more targeted towards the traders on the stock exchanges. These can be very useful for quickly deploying cash in liquid funds and reversing it if needed. Margins can be acquired against the units quickly by authenticating the request using one time password (OTP). Investment experience on a stock exchange may be a seamless one.

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A trader may find it painful to transfer money from a broker to his bank account and then initiate an investment in an open-ended liquid or overnight fund. Also, when he sells units of an open-ended scheme, the money hits his bank account, which again needs to be transferred to the broker for trading purposes. That makes many traders prefer liquid ETF over an overnight fund.

Umesh Kumar Daila, Head - ETF Sales, Mirae Asset Investment Managers (India), says, “Liquid ETF is aimed at catering to the needs of investors in the capital market. It offers a seamless experience to investors keen on parking their idle funds to use for a short period.”

However, a point to note is units held in ETFs cannot be used for systematic transactions in mutual funds.

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Anil Ghelani, Head, Passive Investments and Products, DSP Mutual Fund says, “Open-ended overnight and liquid schemes can be used by corporates for parking their surplus cash and by individual investors for needs such as short-term parking of cash or for initiating systematic transfer plans into some other scheme. Liquid ETFs are meant for those who want to trade on the stock exchange and are looking for intermittent parking of funds with a high level of convenience.”

Costs

The expense ratio of overnight funds range between 10 to 30 basis points. The expense ratios of liquid funds are between 12 and 50 basis points. Liquid ETFs charge relatively higher expense ratios – from 25 basis points to 69 basis points.

Traditional open-ended liquid funds have graded exit load till the seventh day from the date of investment. Also, the investors will have to pay brokerages and other statutory charges while investing in liquid ETF. Though some brokers choose to waive the brokerage, the investors need to confirm the same before transacting and must assess the cost-benefit in the light of convenience and returns these schemes offer.