As the macro economic situation may take some time to improve, investors have to exercise abundant caution by maintaining adequate liquidity in their portfolios to ensure investments are easily encashed. Here are a few steps to ensure that your portfolio remains reasonably liquid.
Review your contingency fund
Though investors are advised to create a contingency fund, very few follow it up with concrete actions. Ideally, you should have kept aside funds to pay for at least six months of expenses and equated monthly instalments (EMIs). This amount should be parked in bank fixed deposits and liquid funds. Liquid funds with instant redemption facility provide further comfort. As your income and lifestyle improve, your contingency fund’s size needs to be enhanced accordingly.
Liquidity of your investments
A large section of your investments should be in liquid investments. Shares, equity and bond funds, are liquid in nature. If you sell these, you can realize money quickly – typically in 2-5 working days. However, your investments in tax-saving funds are subject to a lock in of three years. In fact, each of your SIP instalments gets locked-in for three years. Investments in unit-linked insurance plans also come with a five-year lock in. Investments in traditional life insurance policies score low on liquidity.
Some of your investments such as public provident fund and employee provident fund offer liquidity only on fulfilling some conditions. For example withdrawals from EPF are allowed for reasons such as medical purpose, education, marriage, home purchase, home loan repayment, subject to fulfilling certain conditions.
Selling a property in this weak market is an onerous task. Investments in traditional fixed-income investments also score low on liquidity, but they fetch stable, assured, and in some cases, regular, returns.
If you rate all your investments on the liquidity parameter, you get a better idea of your money situation. A review of your portfolio can help you tackle the situation if you need to raise cash quickly.
Loan against security
If you have a majority of the portfolio in less liquid investments, do not sell immediately. Change the composition over a period of time. You may tap banks for loans against securities if you are pressed for liquidity, before your liquidity situation improves. But be prudent with this option; any excess can land you in trouble.
Pre-pay home loan or retain surplus?
If you have some cash lying idle with you and you have a home loan, should you prepay and reduce your burden? Some of us prefer to prepay the loans so that the equated monthly installments burden comes down. That works, if you have a large amount that you can pay off and reduce the number of EMIs substantially. The flipside? Your liquidity comes down as you utilise your surplus cash.
But if your loan doesn’t come off substantially, then here is a strategy to reduce your burden and still maintain liquidity.
Opt for an overdraft facility with your home loan. Deploy your surplus cash in this overdraft (or current) account. The bank considers this deposit as a loan pre-payment – the loan outstanding is reduced to the extent of the deposit for the calculation of the interest component of your EMI. Your EMI remains constant, but your principal payment gets accelerated. In future, if you need the cash (lying in your savings account), you can still withdraw from it and your loan outstanding will change accordingly. But atleast the surplus cash is available for you should you require it.
As the pandemic is yet to peak, it is better to review your portfolio’s liquidity periodically.
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