When it comes to investment and savings options, most people are often confused about the meaning of liquid terms. A liquid asset refers to an asset that can easily be converted into cash without incurring any loss. Financial institutions have a plethora of liquid assets which include, savings account, fixed deposit (FD), and short-term financing options like SDP. In this article, we will be discussing in depth what an FD is, how it works, and why it is a liquid asset.
Liquid assets are important for individuals and businesses alike. Individuals need liquid to meet their day-to-day expenses, such as rent, groceries, and transportation. Businesses need liquid to pay their employees, suppliers, and creditors.
There are several types of liquid assets, each with its own advantages and disadvantages.
Some of the most common types of liquid assets include:
- Cash: Cash is the most liquid asset, as it can be used to purchase goods and services immediately. However, cash also carries the risk of inflation, as its purchasing power can decrease over time.
- Money market instruments: Money market instruments are short-term debt securities issued by governments and corporations. They are considered to be very liquid, as they can be easily bought and sold. However, they typically offer lower interest rates than other types of investments.
- Bank deposits: Bank deposits are another type of liquid asset. They are insured by the government up to a certain amount, so they are considered to be relatively safe. However, interest rates on bank deposits are typically low.
- Fixed Deposits: Fixed deposits (FDs) are financial instruments offered by financial institutions and banks. They allow individuals and businesses to invest a certain amount of money for high return over a stipulated period of time. FD is genuinely a liquid asset because it offers a low-risk investment, along with high returns and flexible tenure, making them a safe and secure way of investment.
Let us look at a few benefits of FD as a liquid asset:
- The best thing about an FD is its simplicity in terms of investment- you do not need to have in-depth knowledge of investments and the workings of the stock market to invest in an FD.
- FDs are flexible in terms of interest payout and hence one can choose of they want monthly, quarterly, half-yearly or yearly returns with FD instead of payout at maturity.
- FDs have the option of premature withdrawal, though it comes with a small fee, but this option is handy during emergencies.
- To avoid breaking your FD, you can also take a loan against FD and fulfill requirements of cash in times of need. This keeps your deposit intact and safely invested and you still get the emergency fund needed.
When choosing liquid assets, it is important to consider your individual needs and risk tolerance. If you need access to cash quickly, then cash or money market instruments may be the best option for you. Furthermore, if investing in FD, you can use an FD calculator to figure out the interest payout and select a customised plan that suits your financial goals the best.
Here are some additional tips for using liquid assets:
- Keep a healthy emergency fund in cash or a money market fund. This will give you peace of mind knowing that you have access to cash in case of an unexpected expense.
- Invest in liquid assets that offer a competitive interest rate. This will help you grow your money over time.
- Rebalance your portfolio regularly to make sure that you have the right mix of liquid assets.
By following these tips, you can ensure that you have the liquid you need to meet your financial goals.
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