Liquidity isn't the be-all-and-end-all of investment metrics. But it can be crucial to investors since it measures how easily they can convert their assets into hard cash if they need to.If you're suddenly and unexpectedly faced with financial obligationsand all of your wealth is tied up in non-liquid investments, you may effectively be poorer than if you had just put all of your money into a savings account and watched it slowly lose value due to inflation.
Even if you don't invest in risky financial products –unexpected medical bills, abroken-down carin desperate need of repairs, or aburst pipe in your homeare all financial obligations that may strike without warning. Keeping some of your money easily accessible for such cases is just common sense.
For example, imagine you're putting all of your money into real estate as a long-term retirement investment. Real estate is generally considered to provide reliable returns at minimal risk, but it's also highly illiquid. Now imagine you or one of your loved ones suddenly fell ill, and the medical bills start piling up. You usually won't be able to find a buyer for your property on short notice, but the rent you gain every month isn't enough to cover the bills either. Suddenly you find yourself in urgent need of cash and might be forced to take out a loan, even thoughyou could easily pay your bills if your money were in liquid assets.
This is also why personal net worth is a somewhat deceptive measure of a person's wealth since much of that net worth may be tied up in highly illiquid assets.
FAQs
Liquid assets like money market accounts, high-yield savings accounts, and CDs are among the ways you can invest your emergency fund money so that it can grow and remain accessible.
Is it safe to keep money in liquid funds? ›
A liquid fund investor can keep his or her money for as long as necessary. Although there is a minor exit load for redemptions within seven days, liquid funds have flexible holding periods. This allows for simple entry and exit while delivering safe, market-linked returns for the duration of the investment.
What is the most liquid income investment? ›
Cash is the most liquid asset possible as it is already in the form of money. This includes physical cash, savings account balances, and checking account balances. It also includes cash from foreign countries, though some foreign currency may be difficult to convert to a more local currency.
What is a liquid investment? ›
A liquid asset is an asset that can be readily converted to cash or cash cash on hand. An asset that can readily be converted to cash is similar to cash itself because the asset can easily be sold with little impact on its value. Liquid assets are the most basic type of asset.
Where do rich people keep their liquid money? ›
Cash equivalents are financial instruments that are almost as liquid as cash and are popular investments for millionaires. Examples of cash equivalents are money market mutual funds, certificates of deposit, commercial paper and Treasury bills. Some millionaires keep their cash in Treasury bills.
Where to get 10 percent return on investment? ›
Investments That Can Potentially Return 10% or More
- Growth Stocks. Growth stocks represent companies expected to grow at an above-average rate compared to other companies. ...
- Real Estate. ...
- Junk Bonds. ...
- Index Funds and ETFs. ...
- Options Trading. ...
- Private Credit.
Tax on liquid funds
- Short-term Capital Gains (STCG): If you redeem your liquid fund units within 3 years of purchase, any gains you make are considered STCG.
- Long-term Capital Gains (LTCG): If you hold your liquid fund units for more than 3 years, the gains are categorised as LTCG.
The disadvantages of liquid funds are as follows: Exposure to certain risks: Liquid funds may carry some risks like inflation risk, interest rate risk and credit risk. You can minimise some of these risks by choosing your mutual fund house and scheme after careful analysis.
What is better than liquid funds? ›
However, a new market player, arbitrage funds, has been gaining traction as a potential alternative to liquid funds. These funds have been touted for their ability to provide stable returns while also offering the potential for higher yields.
What is the safest investment with the highest return? ›
Here are the best low-risk investments in June 2024:
- High-yield savings accounts.
- Money market funds.
- Short-term certificates of deposit.
- Series I savings bonds.
- Treasury bills, notes, bonds and TIPS.
- Corporate bonds.
- Dividend-paying stocks.
- Preferred stocks.
Best ways to earn this type of passive income include:
- writing books.
- online course.
- affiliate marketing.
- information products.
- creating music.
- digital products.
Imagine you wish to amass $3000 monthly from your investments, amounting to $36,000 annually. If you park your funds in a savings account offering a 2% annual interest rate, you'd need to inject roughly $1.8 million into the account.
Is a CD considered a liquid asset? ›
“The main drawback of a CD is that it's an illiquid asset unless you're willing to pay the early withdrawal penalty," said McHugh. “On the other hand, the funds are FDIC insured and you're guaranteed a specific rate of return."
Is your home a liquid asset? ›
Non-liquid assets can be difficult to convert into cash or cash value, and can come with a significant loss in value. For instance, real estate is never liquid. You might have significant equity in your home, but using that equity to pay for the costs associated with a sudden health emergency may be challenging.
Is it good to invest in liquid funds now? ›
Yes, liquid mutual funds are a better investment option than short-term FDs as they have no lock-in period. Furthermore, there is no penalty if you withdraw your money after 7 days.
Which investment usually has the best liquidity? ›
Since money is the ultimate goal of all investment activity, cash is considered the most liquid asset of all. But there are other investment choices that may benefit your portfolio.
Where should I put my liquid cash? ›
The 10 smartest place to keep your money are:
- High-yield savings accounts.
- Certificates of deposit (CDs)
- High-yield checking accounts.
- Money market accounts.
- Treasury bills.
- Treasury notes.
- Treasury bonds.
- Municipal bonds.
Cash is the most liquid asset, followed by cash equivalents, which are things like money market accounts, certificates of deposit (CDs), or time deposits.
