Investments can be grouped according to various criteria, one of which is liquidity. In the world of finance, liquidity is the ability of an asset to be converted into cash without losing its value. Liquid investments, such as money market funds, special funds like MansaX and company stocks, are easy to exit while illiquid ones like real estate and long-term fixed deposits are hard to offload without a substantial loss in value.
Usually, investors picking a product to invest in give more prominence to features such as the expected return and level of risk carried, and fail to consider liquidity. However, staying liquid should be a priority for any investor. Here’s why:
- Emergency readiness
By far, the biggest financial lesson of 2020 was to always be prepared for emergencies. You can do this by always having liquid assets at hand to help you weather unforeseen events. Liquid investments will make money quickly available to deal with any emergency you encounter.
- Opportunity readiness
Imagine a great opportunity presents itself – it could be for a business, investment or just a really good deal on something you have been eyeing. It is too good to pass up, and you only have a limited time to act. You have a piece of land whose price is about the same as the opportunity, but it will not help you. Why? Because it would take too long to sell the land and even if you found a quick buyer, you would have to sell for much less. This would not be a problem if you had a couple of liquid investments in your portfolio.
- Reduced risk
Since they can be sold quickly for their full value, liquid investments typically carry lower risk than their non-liquid counterparts, especially during market volatility. When the market is uncertain, the only way to offload an illiquid investment is at a steep loss.
- Higher credit rating
Having liquid assets can help with your credit rating, which is helpful if you are seeking a loan. Lenders may give you better credit terms because to them, your liquidity indicates a higher likelihood of repaying your loan on schedule. It also denotes discipline on your part.
Want to learn more about making part of your portfolio liquid? Email us on clientservices@sib.co.ke.