Complete Guide to Liquid Investments
Posted by Frank Gogol in Investing | Updated on June 20, 2023
If you are expanding your investment portfolio, you have probably heard about liquid assets and liquid investments.
Liquid investments are investment options like stocks, bonds, or mutual funds. Generally, liquid investments are seen as low-risk investments since the value remains largely the same when sold.
Similarly, a liquid asset is an asset that is cash or can be easily converted to cash. Liquid assets can be sold with little impact on their value which is equivalent to their cash value.
Below we unpack liquid investments and whether it could be a good investment for you.
What Are Cash Equivalents?
Liquid assets are an important part of your investment portfolio. Cash is a liquid asset because it doesn’t lose value when sold. A cash equivalent is an instrument that can be easily converted to cash.
Liquid assets (cash or cash equivalents) – are the most basic type of asset available.
A cash equivalent is an investment with a short-term maturity that can be quickly converted to cash. Typically these cash equivalent investments have short-term maturities of less than 90 days.
Stocks, bonds, and mutual funds are cash equivalent funds. Stocks and marketable securities are considered liquid assets because they can be converted to cash in a relatively short time. Similarly, U.S. Treasuries and bonds can also be easily sold and converted into cash.
Mutual funds are considered liquid since investors can sell their shares at any time and receive their money within days. Money-market funds, a type of mutual funds, are also cash equivalent, liquid assets.
Non-Liquid Assets Explained
Non-liquid assets, such as property, vehicles, or jewelry, can take longer to sell and therefore isn’t as quick to convert to cash. Non-liquid assets may lose value in the sale, and as such are not cash equivalent.
For example, imagine the process of selling a real estate investment. The process of selling the property may take a long time, as you need to find a buyer, negotiate and agree on a price, and set up the closing for the sale. If you want to sell the property quickly, you might have to sell it for a lower price than its current market value. This is why a property is considered a non-liquid asset.
When selling a stock, on the other hand, you can usually find a buyer who will pay market value for the asset. The transfer of money can happen within a matter of hours. That is why stocks are considered liquid assets.
Liquid assets can be easily sold for cash and have a stable market price. Non-liquid assets cannot be quickly sold for cash and prices can be much more volatile.
Other Types of Assets
An asset is anything that you own that has an economic value. The value of an asset is often taxed.
Assets are usually classified as either tangible or intangible assets.
Tangible assets are physical and have an easily determined material value on a public market. Tangible assets are at risk of being damaged, lost, or stolen due to the actions of people or acts of nature. Property, for example, is both a tangible and a non-liquid asset.
An intangible asset is immaterial. Intangible assets are often much harder to identify and value. Things such as brand recognition or goodwill can be considered intangible assets. Intellectual property like patents, trademarks, and copyrights are also intangible assets.
Who Can Invest In Liquid Funds?
Liquid funds, such as stocks, bonds, and mutual funds, are available on any reputable stock exchange.
You should invest in liquid funds if you may need quick access to their money, but also would like to earn interest on your cash.
Liquid funds are most suitable if you intend to reach short-term financial goals. There are liquid funds that make 7% to 9% in returns. A liquid fund often offers better interest rates than a savings bank account.
Due to the nature of liquid mutual funds, they are pretty safe bets. Established securities with good track records will usually protect you from volatility, risk, or defaults. This means the interest rates earned are usually lower than other, more risky, stocks. With investments, usually the higher the risk, the higher the reward.
Factors To Consider When Investing In Liquid Funds
If you are considering investing in liquid funds, you should keep the factors below in mind:
- Estimated returns – While a bank savings account gives you relatively low-interest returns, these returns are guaranteed. A liquid investment does not have guaranteed returns. You are taking a risk. Usually, the risk pays off, with positive dividend returns and up to 9% returns on investment.
- Financial goals – Depending on what your financial goals are, liquid investments might be appropriate. If you are trying to establish an emergency fund, liquid investments are great. The funds generate returns, and you can easily pull out your invested cash when there is an emergency.
- Investment term – Liquid funds are best suited for short-term financial goals. For long-term investments, including your retirement fund, consider other funds to invest in.
- Amount of risk – Among all available debt funds, liquid mutual funds have the least amount of risk. However, the fund can experience a sudden drop in value if the underlying securities decline. Even though liquid funds are not entirely immune from declines, they are the safest.
- Cost – You will be charged a fee for liquid funds. This often takes the form of a fund manager’s fee. The expense ratio for liquid funds is usually lower than traditional investments due to the fund manager’s investment strategy to hold till maturity. This low expense ratio helps to provide favorable higher returns in a short time.
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A liquid asset is an asset that is cash or can be easily converted to cash. The asset can be sold with little impact on its value – it is equivalent to their cash value.
Liquid investments are investment options like stocks, bonds, or mutual funds. These investments have a value that remains largely the same when sold because there are a large number of interested buyers and ownership can be easily transferred.
Liquid investments offer relatively high returns over the short term. Liquid funds are best suited for short-term financial goals and setting up emergency funds.