The ways to keep cash or cash equivalent or liquidity at hand is changing but its importance remains intact or has even grown more with rising uncertainty in the job market. Cash still is the most important asset class as it comes to the rescue at times of emergency, which no other asset class does except for gold to some extent.
Job losses in the downturn have been significant and some estimates put it at more than one crore, cash forms a very significant component in your entire asset class to bail you out of any such situation. According to a study by the Outlook Research Foundation, job losses in both the organised and unorganised sector in India has crossed 12 million in the year 2008-09.
Experts feel that in such unstable times cash should be kept first to help you sustain and also to meet your emergency needs.
How much cash should you have
The amount of cash or cash equivalent will depend on your monthly expenditure and on your stability quotient in job. “Ideally one should have cash to sustain the entire family for at least 4-12 months based on the stability of income and the job,” said Amar Pandit, a Mumbai based financial planner.
While this may act as a contingency fund to sustain your family and its expenditures, it will also help you meet any other emergency.
In what form?
As it is established that cash is a must in one’s portfolio, it is even more important to manage it and divert it into the right channels. While there are short-term fixed deposits where one can invest for 15 days to one year and earn between 5 per cent and 6 per cent per annum, there are cash management funds that invest in the call money market that lend to banks and other dealers for up to 14 days and help you benefit from short-term interest rate fluctuations.
The other commonly used instrument is the saving bank account that earns you 3.5 per cent per annum.
The amount that you think can sustain you for the first 2-4 months should be kept in the form of savings account with bank and the rest can be deployed in short-term fixed deposits. “Ideally 40-50 per cent of cash should be in fixed deposits while 30-40 per cent can go into a cash management fund. The remaining 10-20 per cent should be kept in a savings bank account,” said Pandit.
Again, the quantum of money would decide this ratio. If you have only Rs 1 lakh then obviously you need to keep all of it in your savings bank account.
“Fixed deposits of three months with a roll-over option is a good way to keep cash,” said Surya Bhatia, a Delhi based financial planner.
Another option that is available is the overdraft facility on the fixed deposits that are available at two per cent above the interest being earned on the fixed deposits. “Through this one can take a loan against fixed deposits as this preserves your fixed deposits and offers additional credit,” said Pandit.
Thus it is not only important to have ample cash but also need to have them in the right instruments so that they can fulfill your needs and earn good interest for you.