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Why should you plan your liquidity needs?

  • Highlights

  • Building up an emergency fund

  • Preparing to meet various financial costs

  • Reducing risk of insolvency

  • Promoting better financial planning

Maintaining liquidity is an essential part of any sound investment strategy. While investing, it is important to remember one important lesson – at least some portion of your savings should be kept in liquid assets. Liquid assets help you cater to your expenses, whenever you need funds.

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Liquidity determines how fast an asset can be transformed into cash at hand. Liquid assets can be broadly categorised in two groups: cash and other liquid assets.

Why should you create an emergency fund?

Having an emergency fund in a savings account is a basic part of personal finance, although some still follow the traditional ‘cash under the mattress’ approach. But how much of cash should you keep aside? According to the thumb rule of saving you should set aside 5% of your savings as Emergency Fund.

You can invest in high return investment options like fixed deposits, for growing your emergency fund. It helps ensure that you keep accumulating funds regularly.

Additional Read: 5 Ways to Invest in an Emergency Fund

Emergencies are sudden, they hit you without warning; so, to be better prepared for any impending emergency it is advised to maintain a corpus comprising of both cash and liquid assets.

How liquid assets can help?

Can cash at hand cover all your needs? Remember the opportunity cost involved in hoarding your cash in the bank or keeping it idle can overshadow the return provided by an investment.

Given the current inflation rate of 7-8%, it is wise to bank upon liquid assets to meet your liquidity needs. Liquid funds invest predominantly in highly liquid money market instruments and debt securities of very short tenor and hence provide high liquidity.

Short-term instruments are Treasury Bills, Commercial Paper, Certificates of Deposit and Collateralised Lending & Borrowing Obligations that have residual maturities of up to 91 days.

Here’s a look at how liquid assets can be beneficial for you:

Ready to Strike

Having liquid assets at hand can act as a financial cushion while also improving your investment portfolio. Liquid assets can also be utilised to buy new investments at the optimal time without redeeming other investments. You can sell those other investments at your own convenience.

Lower Risk

Since liquid assets can be sold swiftly and at full value, they typically involve lower risk than non-liquid assets. When investors get nervous, like during a financial crisis, they might be able to sell a non-liquid asset but can account a steep loss in the process.

Stronger Financial Profile

If you are planning to apply for a loan, liquid assets can increase your chances of approval. In some cases, investors could require you to have three months’ worth of living expenses in liquid assets. You can score even more points with that lender, if you can prove you have six months of expenses in a savings account.

DISCLAIMER: The mentioned fixed deposit interest rates are indicative only, and may be subject to change periodically. Please check the interest rates on our website.

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