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.
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.
Additional Read: How A Personal Loan Can Help You Deal with Liquidity Crisis
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.
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