What is cash component or cash equivalent and how to make use of it?
A cash component or cash equivalent represents a form of collateral margin that arises from pledging certain securities. This includes a range of liquid assets such as money market instruments, government securities, ETFs, and liquid mutual funds. These can be effectively utilized for equity intraday trading or trading in derivative contracts.
For traders engaged in intraday or Futures & Options (F&O) trading, the cash lying idle in your account can be more than just a margin requirement filler. By investing in and pledging securities considered as cash components, not only can you continue to trade smoothly, but you also have the potential to accrue interest, dividends, or capital gains on these investments.
Advantages of using cash components as collateral:
Trade without the need for additional cash deposits, exempting you from the 50-50 cash-collateral rule.
Earn passive income through interest, dividends, or appreciation while it's pledged for trading.
Cash components offer high liquidity, making access to your funds straightforward and quick if needed.