An investor can invest in options such as mutual funds, stocks, and bonds. This cash reserve need not be just a bank balance in a savings account. Hence, liquidity makes sure that you are covered with your cash reserves. An investor might need to fund a sudden expense for which he or she did not account earlier. There might be a medical emergency for which you need your funds overnight. Recent times like Covid-19 have taught a valuable lesson which is uncertainties in the world. Liquidity makes sure that you have enough cash to fund your financial emergencies. In absence of liquidity an investor might have to redeem their long-term investment plans. They mostly focus on securing their future and ignore safeguarding their immediate unexpected requirements. Many investors neglect to plan for unexpected emergencies that can happen at any time. Needless to say, it is crucial to plan liquidity before investing and making sure of the availability of funds when in need. Hence, it is important if an investor wants the availability of funds to spend. Liquidity is the power of being able to convert and spend. However, it also comes with other factors like return, associated volatility, and so on. A liquid asset provides an added advantage of the capability to encash at any time. Examples of liquid investments with ease of conversion are mutual funds, stocks, bonds, and money market instruments. No doubt early withdrawals are allowed but with premature withdrawal penalties. In India, PPF investment is a fine example of restricted liquidity due to its lock-in period. On the other hand, long-term investments might have restricted liquidity. For instance assets like real estate would take a longer period of time to be converted into cash. Simply put not every asset will have the same level of liquidity or ease of conversion. Moreover, cash is the most liquid asset that an individual can hold. In simple words, liquidity of any investment or asset refers to the ability or ease with which it can be converted into cash. What is the difference between assets and liquid assets?.
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