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The liquid investment factor

Some factors assume importance when a person wants to put money in liquid investments. These factors will impact the manner in which the investment will perform and what the investor will get out of it.

business Updated: Nov 17, 2008 21:39 IST

Some factors assume importance when a person wants to put money in liquid investments. These factors will impact the manner in which the investment will perform and what the investor will get out of it. They include the time taken to convert the amount to cash and the kind of risk that the investment carries. Here’s how each of these factors work.

Time taken
Any investment can be termed as a liquid investment when there is an ability to quickly convert the investment to cash.

Some investments take slightly longer to liquidate while many others can be converted to cash in a very short time.

Investors on their part have to consider the liquidity angle carefully because there might be situation wherein they have to get cash for the amount invested because of requirements elsewhere. Ready cash can be given immediately but an amount in a liquid scheme will take a day or two before it can be cashed. If the money is locked in for a longer time, it will fall into a separate category on the liquidity angle.

Some investments get locked in without an exit route. These kind of investments include long-term bonds. On the other hand certain long-term investments such as fixed deposits have an exit option though this might come at a cost in the form of a penalty to be paid if you are liquidating the investment before the period agreed upon.

Risk involved
Liquid investments are usually low-risk because the form used in these investments is near cash or anything that can be liquidated soon. However this is not always the case. Several investments are considered liquid in nature but also carry higher than necessary risk and this often works to the disadvantage of the safe invstor who is looking for several specific characteristics.

For example short-term mutual fund schemes have some element of risk depending on the nature of investments here. Many investors just take a look at the returns being generated and don’t are much about the risk in the entire process. But this risk can change the entire nature of the investment. This is also the reason why we have a distinction between liquid and liquid plus mutual fund schemes in the market though for many people there might not be much of a difference. Thus the risk element also has to be very carefully understood and then applied to determine the validity of the investment.