Complex Made Simple

Why you need liquid investments in your financial portfolio

By Pankaj Gupta, the Associate Director of SMC Comex International DMCC

The first issue with having a financial repertoire is that a plethora of people are not aware that they need a financial repertoire, to begin with. A rule of thumb is this: create a channel with a pool of your wealth that provides you a stable passive income, month on month, or acts as a liquefiable asset in times of trouble. Basically, create an investment base that helps you sleep at night. Sounds simple enough, but what really is a liquid investment?

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Understanding your assets

The liquidity of an asset, which refers to how quickly one can convert the asset to cash, depends on its form, function, as well the sector it belongs to. It is also an ability to buy or sell a security without affecting the asset’s price. When you’re talking about investments, your liquidity is basically how “easy” it is to buy and sell. Assets that are fixed or illiquid, are assets that would be difficult to exchange for cash, such as one’s home, or a car. In fact, a car can even forgo the status of being a “liquid asset” at all, what with the depreciation it incurs.

Cash is among the most liquid of assets since you can use it to buy just about anything but you cannot avoid inflation diminishing the buying power of cash. Many stocks traded on the major exchanges are considered fairly liquid since you can convert them into cash quickly and easily because there is almost always another investor willing to buy your shares.

That being said, sitting in cash alone is a terrible investment.

Even bank interest rates don’t rise much higher than 1-2% of account balance. Remember, net interest rate is interest rate minus inflation.  Which means that there is a need to create a portfolio that accounts for Gold, stock as well as funds. Such portfolios can be started with small upfront investments and can be build up over time by using a Systematic Investment Plan (SIP).  

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How much liquidity is enough?

According to a special CNN report, it has been advised to affluent investors to keep up to 40% of one’s assets in cash for those cash-holders looking at investable assets upward of $ 250,000 . For the average investor, one is advised to hold on to at least three to six months’ worth cash in their arsenal as “emergency funds”. But these need not necessarily be stowed into a low-return savings account.

One of the great liquid asset one can keep is Gold bullions as sale and purchase of jewelry will bring damage from making charges. Being a commodity that is almost always looking up price-wise, and considered as safe heaven against all anomalies, Gold is always in demand. Just regular purchase of Gold stowed into a bank box is ideal and easy to sell in case of a rainy day or if you understand future market mechanisms, you may choose to buy gold with little investment with no risk of theft. Putting money away into shares, stocks and mutual funds also allows one to keep their money in a liquid state. Of course, in terms of such investments, the higher the return rate, the higher the risk, so an amount that doesn’t strain one’s finances should be used to invest into things such as fast-moving stocks.

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Term deposits are good when looking at creating a liquid asset base but will only provide you a little return. On the other hand, when you invest in a stock with a locking horizon of 5 years, it is least likely to damage your initial capital and provide a greater long-term return but ensure your returns are guaranteed and not dependent on market movements. In case your returns are linked with market movements, fast-moving and quick turnaround stocks will at least allow you to exit at your will. The best way to balance your portfolio is to sit down and create a SIP with a financial advisor which can benefit from market moods for a good return.