This article will speak of how to use LiquidBEES – an ETF that is a place to park cash for the short term – as an alternative to keeping cash in your trading portfolio. Let us explain it in detail.
This is an Exchange Traded Fund which invests purely in the overnight money market. This gives it a very high degree of safety and high degree of liquidity. Safety because the money market keeps money for a very short term (overnight or ultra short term) and is monitored by the RBI to ensure there are no challenges in terms of repayment or liquidity.
And you can buy and sell it like a stock.
The way it works is:
Now why is this good? Because if you store cash with the brokerage company, they pay you no interest. So you might as well buy LiquidBees to get some interest where you had none.This is an easy way to “park” money with the brokerage and earn interest too.
Some brokers like Zerodha charge zero brokerage when you buy a stock – only a demat charge of Rs. 15 per day when you sell it. The low cost of entry allows you to maintain large balances in LiquidBees, while waiting for opportunities to deploy the cash.
When you want to buy stocks you can sell the LiquidBees and typically brokers allow you to buy on the same day, so you can buy your stocks on that day itself.
The risk on LiquidBees is very low since they invest in overnight investments only. And there is so much you can do with it!
We’ve spoken of parking cash and earning interest on it while you find opportunities to invest. The post tax yield is low – so if you get 7% interest, then the post tax yield comes to 4.9%. Yet, this is better than keeping the money in a savings bank account (pre-tax yield of 4%) and way more liquid than a fixed deposit (where if you exit early the penalty hits you, and post tax yields are 4.9% there too).
You can also use LiquidBees for trading margins. If you buy a future, you don’t have to actually pay the full money to the exchange. You just need to place money as ‘margin’. Now you can put stocks in as margin, but stocks can only constitute 50% of the margin required, and the rest should be cash.
LiquidBees is considered as equivalent to cash. If you pledge your LiquidBees holdings, they give you 90% of the value as margin – which is called a 10% haircut. Since this is treated as cash, you don’t need any more cash in your account to be placed as margin.
Why is this useful? Think of options trading.
Let’s say you have Rs. 100,000 in LiquidBees (100 units). You pledge them and your broker gives you a margin of Rs. 90,000. (You pay no interest on this margin, it’s just available to you)
Say you decide to sell one lot of Nifty 8000 call and buy one lot of Nifty 8100 call – prices are Rs. 100 and Rs. 50. You will get Rs. 100 and pay Rs. 50, so you will receive Rs. 50 as a net premium. (for a 75 lot, that’s Rs. 3750 premium received). But NSE will ask you for margin, of say Rs. 30,000 per lot. This Rs. 30,000 can be provided through the above pledged LiquidBees units, which gives you enough coverage to play that strategy. Out of the Rs. 90,000 you can get as margin against your LiquidBees, Rs. 30,000 is blocked now for this strategy.
If, at the end of the month, Nifty is below 8050, you will square off both transactions on expiry and your margin will be opened fully again (back to Rs. 90,000). And you get to keep whatever profit you make. (Anything below 8000 and you may Rs. 3750 profit, and above that to 8050, your profit diminishes).
If Nifty is above 8050, you will “lose” money, which means you will need to pay for this loss, but the maximum loss is at 8100 or above – a fixed loss of Rs. 3750. On the expiry day, you just have to provide this loss amount as cash, and you will be okay.
Effectively, you have had a month of a strategy run while you earned interest on the LiquidBees holding. At, say, 0.5% a month, you would have earned Rs. 500 with the LiquidBees holding itself.
Think of LiquidBees as giving you a buffer against a potential loss.
Answer: Yes. Even Futures need margin, and you can pledge LiquidBees for that margin.
But there is one difference: the daily mark-to-market cost. If you buy the Nifty future at 7900, your margin may be Rs. 50,000 (covered by pledging LiquidBees). At the end of the day the Nifty falls to 7800, you have “lost” Rs. 100 = Rs. 7500 per lot of Nifty (Lot size is 75 today).
This Rs. 7500 has to be paid to the exchange. This has to be paid out in cash, not as LiquidBees units.
The mark-to-market can also be cash received, in case the Nifty goes up in this case! That cash just goes and sits as a positive cash balance. This will be useful for M2M payouts when you have a loss.
Well, you can’t pledge liquid mutual funds to get margin – so margin is where LiquidBees is advantageous.
But for any other use case, Liquid Mutual Funds are better. With LiquidBees you have dividend paid and tax cut every day. With a Liquid mutual fund, you can keep the interest in the fund and you will not be taxed on it until you exit! The net tax may be the same if you exit within three years, but it gives you a chance to move your tax liability to another year.
Also, if your net taxable rate is less than 30%, Liquid Mutual Funds are better than LiquidBees. (Because when you sell them you will pay the lower tax slab rate on the capital gain, whereas LiquidBees always pays 30% tax on the daily dividends paid)
is much better than keeping idle cash in your account.
What you need to watch for are:
We hope this has helped you understand how you can use LiquidBees as a stock, but have very low risk. And you can use it for our option strategies (like StratOptions) to optimize margin usage. Please let us know any questions you may have in our Slack channels. (if you are a Premium member – if not, Subscribe!)
Nothing in this newsletter is financial advice and should not be construed as such. Please do not take trading decisions based solely on the matter above; if you do, it is entirely at your own risk without any liability to Capital Mind. This is educational or informational matter only, and is provided as an opinion.
Disclosure: The authors at Capital Mind have positions in the market and some of them may support or contradict the material given above, or may involve a direction derived from independent analysis.