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. Actually the truth is once you decide that you do not understand liquidity requirements, then you act like a mad man.

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. Sanjay Singhaniya

    A very nice article. But I believe debt investments are supposed to be more liquid compared to real estate and stock market.

    Also, 6% p.a. difference in returns between liquid funds and bond funds/bonds is too much to ask for. If there is so much of difference then probably the bond fund/bonds has too much of AA- grade investments.

    @Subra Sir, Can you recollect when there was so much of difference in returns “per annum” for, say, 10 years?

  2. LAS on bonds/mf ?

    Fixed costs are ridiculously low (yearly renewal charges only) and your money keeps on working hard. FD are too tax inefficient, or realised income as you term it.

  3. why single out liquid funds- they give annualized 9% return, anyway equity remains the trusted one, nevermind the rigorous diligence needed to be in stocks..!

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