Over the past 2 years there have been many bond issues by the PSU bodies and all of them were fully subscribed. IN fact even the Green Shoe option was filled up. However when I spoke to a few people they were worried about the liquidity of the bonds. Sure the markets are not too deep and you will find it difficult to sell the bonds quickly. However if you started investing at age 55 you completed the whole process by age 57. Assuming you applied and got bonds worth Rs. 30L.

If you have a net worth of say Rs. 5 crores, this 30L not having liquidity should not bother you AT ALL. Even assuming a net worth of Rs. 2 crores, should this Rs. 30L be an issue?

All these bonds are listed and have some liquidity. However you may not be able to sell it on the day that you need liquidity – so you may require some planning. If you have a good Bluechip portfolio, mutual funds, bank deposits, etc…how much should we ‘ear mark’ for liquidity? The danger of having too much liquidity is that YOU have to compromise on PROFITABILITY. The returns from savings bank account is very low and not able to meet the basic inflation. Ever.

It is not uncommon to see people having Rs. 40-50L in savings / bank fd / liquid funds..and not having enough in bonds, equities, etc. and when you ask them their answer is “liquidity”. In fact liquidity in their portfolio is hurting their corpus formation – goals are either not met or postponed to a later date. Much later date.

Look at a person having Rs. 50,00,000 in investments which give him a low rate of interest – and let us assume that he kept this amount for a period of 18 years…and this cost him about 6% p.a….this would be worth about Rs. 1.4 crores. This is not a small amount, right? It could have been used for painting the house, investing in a balanced fund, an equity fund…or whatever.

Too many people keep just too much money liquid. I do think ‘family liquidity’ should be more important. If you, your siblings, and your parents all are living near each other consider keeping about Rs. 5L between all of you instead of Rs. 5L individually. For example I am a signatory in my parent’s account – so they need to have NO LIQUIDITY at all – I can provide all the liquidity that they need. Similarly if your siblings / friends – anybody willing to share this liquidity – could be used. Of course liquidity gives you a lot of peace, but does not mean that all you money should be liquid. Do not keep fighting the liquidity vs profitability fight.

Ask yourself the following questions:

Did you have any emergency in the past 5 years?

How did you pay for that?

Do you have adequate disability, health insurance, etc.

Do your parents have an emergency fund? do your siblings have an emergency fund?

How stable is your job? company? industry?

Do you have any big expenditure coming in the next 6 months?

answer all these questions honestly. You will know how much to keep where.

Remember: do not compromise your PROFITABILITY by chasing a never ending LIQUIDITY worry.


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  1. Thanks n it really matter to me. I have some what 20 L in liquid. I kept as i don wanted to put in saving at the same time confused between n real estate n equity in current scnenario, more confused after recent correction. 🙂
    Can u show d way to best deal wid it?
    Current my equity is 20L n NRI FD 10 L
    Thks n Regards

  2. Dear Subra Sir,
    Suppose a person keeps 10 % in liquid funds. Let us assume that average annual returns of liquid funds are 2% less than average annual returns of bonds. So if a liquid fund returns 7% per annum then bonds have return of 9%. Rest 90% portfolio is in bonds returning 9% per annum.

    How much the person has lost in terms networth over 20 years as compared to all bonds portfolio? It is less than 2%.

    The post should have pointed out that if 10% portfolio covers your 1 year expenses then you should not allocate more than 10% of funds to liquid funds.

    I personally prefer to keep 5% extra in liquid funds for buying assets at distress prices.

  3. The loss between 9% return vs 7% return for 20 years is about 30% overall after 20 years. So the difference of 2% return over 20 years is big loss.

  4. If you have lost enormous amount of money in the carnage , I presume that you have lost it in equity and it is short term capital loss. This short term capital loss can be combined with short term capital gains (if you have any) and can be carried forward for the next 8 assessment years.

    You will not be liable to pay any tax on the short term capital gains that you may have for the next 8 years (till it get set off with the loss).

    This can be considered as the silver lining on equity losses.

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