Liquidity is the ability to convert your investment in any asset into money when needed. The time required to convert your investment into cash after completing all due processes is the real measure of how liquid an asset is. The process varies and can be different for different assets. Liquidity in investments is a crucial factor when it comes to various investments.
Liquidity in investments
Liquidity varies depending upon the investment type. Also, knowing how liquid your portfolio is helps you to manage your risk and return profile based on your investment strategy.
Liquid mutual funds – What are they and why are they important?
If you know you would want money in the near future, it is advisable to invest in liquid mutual funds. Illiquid funds offer much greater returns in some cases. However, they can prove to be not so fruitful if you have to sell off all your positions when in utter need of cash in the short term. In case of a liquid mutual fund, you can avail cash in case of any financial crisis. Following are specific points, which discuss the importance of investing in liquid mutual funds:
- The ability to switch within funds
If you have an opportunity to allocate your already invested money in a more efficient manner, you can take advantage of a liquid fund to reallocate your capital to another fund.
- Risk of volatility in markets
During crises, such as the COVID pandemic, liquid funds provide the flexibility to liquidate your investments as per your need. However, these benefits can be availed only in a high-liquidity emergency fund.
- Comparatively higher returns in liquid mutual funds
A savings account can be considered liquid, but it doesn’t provide the same returns as liquid mutual funds. Liquid mutual funds, among other mutual funds in India, provide higher returns than money kept in a savings bank account, and that too in a short span of time.
- Less risk
In a liquid mutual fund, the pooled money is invested in a high rated maturity financial instrument with maturity extending to 91 days. In this type of investment, the risk of your money losing value (loss) is comparatively less. Hence, it is a better proponent to generate better returns at low risk, when compared to equity funds.
Thus, when it comes to drawing out investment strategies, it is prudent to take into consideration your financial standing, any planned expenses in the near future, and be prepared for contingencies.
To ensure that your investments align with your risk-return profile and your portfolio has sufficient liquidity, it is advisable to explore your options with the help of an expert and take smart investment decisions.
Reach out to one today!