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They say, "An opportunity missed is an opportunity lost." Nowhere is this truer than in the fast-moving world of stock markets, where fortunes can shift in an instant.

A fundamentally strong stock hit by temporary negative news? That’s an opportunity to buy. Expecting market volatility and planning to build long-term positions during dips? Time is of the

essence.

That’s why you keep some funds ready to be deployed in your trading accounts. Sure, that gives you ready liquidity to seize market opportunities, but sometimes those opportunities could take

some time to come. In the meantime, your funds lying idle in the trading account make no money for you. To earn an interest, you’d have to keep your funds in a bank savings account, which

while makes you money, doesn’t give you the instant liquidity you want for trading purposes.

What if there was a way to earn returns on your idle funds while keeping them instantly accessible? Liquid Exchange Traded Funds or Liquid ETFs can offer the best of both these worlds.

Liquid ETFs are mutual funds whose units trade on the exchange. These units can be bought and sold at real time prices during market hours, giving you the flexibility to act when opportunity

strikes. For instance, when a buying opportunity arises, one can simultaneously sell Liquid ETF units and buy the shares through their Demat account– making the ETF units equivalent to

money in your trading account.

Liquid ETFs pool investors’ money and invest primarily in overnight security i.e. Tri-Party Repo (TREP) and other money market instruments which are safe, short term debt securities, thus

earning a return. This is in line with their investment objective to generate returns that closely correspond to the returns of S&P BSE Liquid Rate index or the Nifty 1D Rate index.

With the near to medium term outlook for Indian equities being uncertain given adverse global geopolitical and geoeconomic developments, as well as a slowdown in domestic economic momentum,

markets have been seeing a lot of ups and downs off late. With the long-term India growth story intact, these ups and downs can be great buying opportunities for investors looking to build

long term exposures. Given this scenario, Liquid ETFs with the following benefits can be a smart way to wait on the sidelines and take advantage of the ongoing stock market volatility:

No idle cash – Your money grows while waiting for market opportunities

On tap liquidity –Units of Liquid ETFs are listed on the exchanges and can be bought and sold like shares during market hours

No exit load – You can redeem your investment anytime without worrying about penalties

Low costs – Expense ratios of Liquid ETFs are very low. Also, absence of Securities transaction Tax on Liquid ETF transactions makes them suitable for frequent buying and selling

Secure investments – Liquid ETFs majorly invest in short term, government-issued debt instruments, which limits the interest rate risk and credit risk

Collateral for margin trading – Some brokers allow you to pledge Liquid ETFs for margin trading, unlocking more capital for active traders.

Investors should prioritize investing in Liquid ETFs with high trading volumes, low expense ratios and minimal tracking errors. ETFs with high trading volumes would mean there are enough

buyers and sellers to enable transactions at fair prices. This reduces the risk of paying too much when buying or receiving too little when selling. It also results in narrow bid-ask

spreads, which keeps transaction costs lower. While expense ratios of Liquid ETFs are generally low, opting for ETFs with low expense ratios ensures that a larger portion of your returns

stays in your pocket, maximizing your gains. A low tracking error indicates that the ETF is efficiently managed and closely follows its benchmark, which is important when using it as a

low-risk vehicle for parking funds. High tracking error, on the other hand, could eat into your expected returns and undermine the purpose of using a Liquid ETF for short-term cash

management.

Liquid ETFs are a smart financial tool, offering passive income while keeping funds readily available for market opportunities. If you're a trader or tactical investor looking to optimize

capital deployment, Liquid ETFs are a must-have in your portfolio!

The author of this article is Chintan Haria, principal of Investment Strategy at ICICI Prudential AMC.