0 Liquid Funds – A Comprehensive Step By Step Blog Guide

 

 mutual fund categories in the Indian Mutual Fund Industry.


Introduction

Most mutual fund investors comprehend the advantages of diversification and a long-term technique. But it’s valuable to have money at hand for surprising short-term events or economic crises. This is where liquid funds prove to be effective. Rather than letting excess money rot in a savings bank a/c, investors like to park their surplus money in liquid funds. Liquid funds are learned to provide returns of up to 7-8%, which is greater than a savings bank a/c known to have an interest rate of 2.5-4%.   


  


What Are Liquid Stocks?

These are stocks you can trade without substantially influencing their price. You can handily enter and exit. And the quoted stock price is near to the price at which your trade orders will fill. Liquid stocks have steadier charts. Each one-minute candle has a body. There are no razor-thin candles or long gaps between candles with no trend. Greatly low-priced and penny stocks aren’t liquid … We name these as -"illiquid stocks".

According to SEBI’s meaning of liquid funds ,these funds can only capitalize in Debt and Money Market securities with a maturity of upto 91 days. And this very description makes liquid funds excellent to park money for the short term or to develop an emergency fund or as a choice for the savings account.


How does A Liquid Fund function?

A liquid fund is a category of debt mutual fund that can give nice returns than a bank saving account or fixed deposit.

 

The fund manager invests your wealth in a combination of fixed income instruments and debt securities like:

 

·         Corporate Bonds

·         Treasury Bills

·         Commercial Paper

·         Debentures

·         Government securities

·         Certificates of deposit

How corporates utilize Liquid funds?

Many corporates like liquid funds to park their treasury money since the major purpose of investing this amount is -"Capital Protection".

Retail Investors

·         Although liquid funds are frequently utilized by corporates, many retail investors are however too pleased with a conventional savings account or FDs to look for great generating substitutes. And with debt funds encountering heat in recent times due to the IL&FS defaults and identical to such problems, retail investors have factual reservations when it comes to debt funds.

 

·         But Investors believe that acquainted decision-making is the most significant step towards a profitable investment journey and considerable liquid fund returns. And today we will attempt to lay down some facts associated with liquid funds which we speculate will assist you in deciding whether liquid funds are desirable for you.

 

 

Why Is Liquidity crucial for Trading Stocks?

Nothing is alarming than being in an illiquid stock and watching it plunge 10% on the subsequent. And that drop isn’t because of any unfavorable news. It’s because there aren’t sufficient traders to keep the price rolling smoothly. When stocks aren’t liquid, the price might take minutes or hours to shift. Since there aren’t sufficient traders to keep things liquid, the price hops a lot on each trade. If a liquid stock is trading at $10, you can exit(sell) relatively near to that price — $10.10 for example.

Still, if an illiquid stock is trading at $10, you can end up exiting relatively far from that price — $11, for example. That sort of slippage can suggest your losses rack up rapidly. That risk isn’t worth trading illiquid stocks over a lengthy duration. Don’t trade illiquid stocks! They’re chaotic, have huge spreads, and are tough to get in and out of. When you assess illiquid stock charts, it’s powerful to see intraday chart patterns or support and resistance phases too. It’s almost smart trading to bet to liquid stocks.



 

How to Specify Good Liquid Stocks for Trading

Be aware that trading good liquid stocks is crucial in maintaining portfolio consistency. You don’t need to be chopped around each tick. Stock liquidity boosts when stocks are heated and unstable. And it vanishes when they cool off and become less unstable. And hardly because a stock is liquid today doesn’t imply it will be in the future also. Interest in stock can fade rapidly. So you have to understand how volume might reduce with time. A stock that was liquid a week ago might not be liquid today.


OTC Stocks

·         You’ll usually discover illiquid stocks in the OTC markets. We hardly trade them since we like listed stocks. But it’s critical to be familiar with the in case you do. Even when an OTC stock is extremely liquid, it can have liquidity problems during huge price trends. For example, it can be rigorous to sell during a global pandemic like corona and hard to purchase during a market squeeze.

 

·         Sometimes it might take few moments to complete your order. And there will be a huge spread to boot … It’s a cold deal when moments count. OTC stocks will be sluggish to implement even if they’re as liquid as a listed stock.

 

·         It’s crucial to be very critical when trading OTC stocks. Always utilize  Level 2 quotes when attempting to time a trade during an economic compression or anxiety.

 

How Is Stock Liquidity computed?

Stock liquidity is assessed utilizing volume. Volume is how many shares are traded. More volume means more liquidity. You’ll discover liquid stocks will generally have shorter spreads too. Let’s look at how you can estimate stock liquidity.


Extrapolating Volume

·       Sometimes you want to distinguish a stock’s current volume from the last trading day’s volume. But the volume at the advent of the day is commonly a lot less than its cumulative volume at end of the day. So to figure out a stock’s cumulative volume at the end of the day, you have to extrapolate how much more volume it could bring about. Keep in mind, premarket volume is normally lower than traditional trading volume. And the initial hour’s volume is normally considerable of the day.


Dollar Volume

· While volume indicates how many shares were traded. We usually want trade in terms of dollars. After all, our trading account is gauged in terms of dollars. So, another manner to estimate stock liquidity is dollar volume. This provides us a promising idea of how many dollars were traded. It can be a more precise indication of how stock liquidity associates with actual cash. Dollar volume indicates how many dollars were traded over the day.

·    a rough calculation — you can normally contemplate stocks over $10 million daily dollar volume as a liquid. These are extra likely to be susceptible to enter and exit. But stocks that close to $10 million might still be wild and not as steady. I think it’s wise to look for a dollar volume much than the $10 million levels.

·         Keep in mind, you never need your trade to move the market relatively. So strive for an ultimate position size of 1% of the dollar volume in the stock. This is particularly valuable with low-priced stocks that appear liquid. But because their rates are low, so is their dollar volume.

 

Dollar Volume Calculator

Current Dollar Volume = Current Daily Volume x Current VWAP

Dollar Volume = Total Daily Volume x Closing VWAP

VWAP stands for a volume-weighted average price. It’s the average stock price throughout the whole trading day. Many trades at a specific price will move VWAP toward that price.

 

 

Are Liquid Stocks Promising for Share Market Trading?

While you should only trade in liquid stocks, let us tell you not all liquid stocks are promising for trading. Huge proficient is needed for trading in liquid stocks. Stock liquidity is only a part of the puzzle. You gotta contemplate the whole puzzle and make a case for the stock. Is there an impetus? Is liquid stocks a hot pick? Do they follow a favorable pattern? Is it the right time of day to trade in them? By asking all these questions to your broker you can get to know more about liquid stocks and thus you will discover only the best liquid stocks to trade.

 

 

Time of Day

Premarket Hours

Premarket trading arises from 4 a.m. to 9:30 a.m. . It’s usually much less liquid than normal trading hours. You can see premarket action to get a sense of potential trading tips You’ll see some liquid premarket runners that seem to look incredible, but then they end up receding the rest of the trading day. It’s simple to get FOMO and think you should get in before the market clears for a head-start. But I would avert these trades at all expenses.

Wait until after 9:45 to trade a liquid stock. That can assist you to avert crucial price swings in the open day trade. But watch the price activity. Let the liquid stock prove itself.

 

Examples of Liquid Stocks

 

Tesla Inc. (NASDAQ: TSLA)

Tesla has been one of the heated stocks in the market this year. But here it’s presently in a term of consolidation. This stock is incredibly liquid. Its chart is steady, even from premarket at 7 a.m. There’s a significant volume on every 1-minute volume bar. You can detect the raised volume in the initial hour and last hour of regular market trading hours. The cumulative volume for the day was 29.23 million shares. And the cumulative dollar volume for the day was $12.6 billion.

Electra Meccanica Vehicles Corp. Ltd. (NASDAQ: SOLO)

SOLO was an incredible stock during the summer months. But it’s been centralizing for a while. It was relatively illiquid in the morning, but it picked up the volume into the culmination. Note how rough and illiquid premarket and after-hours are. The cumulative volume for the day of this stock was 5.65 million shares. The cumulative dollar volume for the day was $14.4 million.


CytoDyn Inc. (OTCQB: CYDY)

CytoDyn is an amazing  OTC in the share market. But it seems to be down trending. Note again how uneven the price action of this stock is.

Some moments don’t have any trades. These lack volume bars and have razor-thin candles. Unless this stock stimulates more volume, it’s too illiquid to trade. The cumulative volume for the day was 1.79 million shares. The cumulative dollar volume for the day was $5.9 million.

Advantages of Liquid Mutual Funds

Advantage #1: Low maturity period

Investors like liquid funds for the brief term because these funds have a typical maturity duration of 91 days.



 

Advantage #2: Lower fluctuations

The brief maturity duration assures that the fund is less likely to be influenced by interest rate instabilities.

 

Advantage #3: Better stability

More frequently than not, liquid fund returns are very reliable since the short-term securities don’t differ much as differentiated to long-term bonds.

 

Let’s look at the goals of liquid funds at a glance:

 

·         No entry load

·         No exit load

·         High liquidity

·         Lowest interest rate risk

·         Better returns than bank a/c

·         Higher returns than bank FD

·         No lock-in period

Advantage #4 Tax-free dividends

Liquid funds are moreover deemed to be the stablest mutual fund investments accessible to an Indian share market investor. 

 

Are A Liquid Mutual Funds Taxable?

You won’t be accountable to pay taxes on the profits that you earn from your liquid fund investments. Still, you will have to reimburse capital gains tax. Whatever dividends that you earn is recognized as capital gains. These gains are taxed based on the period of your investment (holding period).

 

Conclusion

Stock liquidity is a significant indicator of whether a stock is tradable or not. Even if the setup is there, if the stock isn’t liquid enough — it’s not worth trading it. It’s crucial to understand that either stock is liquid enough … or it’s not. And it’s better to completely avoid the trade if it isn’t. Even if it figures, it’s not worth the risk. There will constantly be an extra ideal stock ultimately.

 

There are many problems in trading in liquid stocks — massive, chaotic price movements, high spreads, and strong executions. All those justifications should be sufficient to stay away! Trading liquid stocks is significant to discovering your market stride. It’s essential to be conscious of stock liquidity so you can discover the best stocks to trade. Liquid stocks manage to have the hugest and best results. So keep a sharp eye on the trading volume and make sure to concentrate on the most popular liquid stocks!

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