That Most Important Attribute
When is a refrigerator not a refrigerator? When it is available in Chicago, when needed in New York. With this example, Philip Kotler made us understand the importance of distribution and availability of the product.
Similarly, if one were to use in the scope of Financial Products, we can paraphrase it thus :
When is an asset not an asset? When it does not give cash, when most needed.
We are talking about Liquidity. An important attribute that describes the ease with which an asset can be converted to cash, with least amount of loss in value.
While talking about Liquidity, two things come to mind. Why is it such an important factor in analysing investment choices? And more importantly, why is it – many a time – overlooked?
Answering the first part is easy. Access to our money or cash, especially when required, is one of the prime considerations in investing. We need money in time to pay school fees, to fund an emergency in the hospital, to purchase a consumer durable or to enjoy a holiday. Our assets and investments need to do give us the money to lubricate our daily life.
It’s the second part that is a mystery. Why is it that investors ignore liquidity and make investment choices that either lock in their money for the longest time or are difficult to liquidate without a loss in intrinsic value. A ten year single premium policy may look safe and attractive right now. But have you thought about liquidity? Is there an extra return to compensate for the lack of liquidity? Investing in real estate may look appealing, especially if there are surplus funds to be deployed and a tax-break to be availed. But what if money is required a few years down the line – can the asset be quickly sold without loss in realisation? The reason : Investors are blinded by other factors – returns, safety or brand – that they forget liquidity.
In my opinion, liquidity is one of the most important attributes in selecting an asset class or investment. It ranks right at the top alongside Return and Risk.
Think. What was the use in buying a great plot of land, when it could not fund your father’s by-pass surgery or having a beautiful diamond necklace, when that was not the ticket to your son’s US education. You had to fall back on the liquid options, didn’t you. Speak to your investment advisor about liquidity today. It’s mighty important.
Profile of Mr.Harish Rao
Harish Rao is a Money Management Coach having his own Financial Services Training unit, Simple Equation.
Harish Rao is a Science Graduate and MBA. Before striking it on his own, he spent a decade with Franklin Templeton Asset Management Co. His last held position there was Vice President and National Head - Institutional Sales. Prior to that he was Vice President - South and East. He also worked with Toyota Motor Corporation in the Gulf for 9 years, before joining Franklin Templeton.
He is a keen quizzer, having featured in Siddharth Basu's Mastermind in BBC.
He has conducted several special courses for Investment Advisors on behalf of National Institute of Securities Markets, a SEBI initiative. He also oversees a special elective on Investment Management and Financial Services, for students of Management Institutes. Besides being a Certified Personal Finance Advisor (CPFA), he is a member of Financial Services Association, USA.
He has conducted over 300 training programmes for leading Mutual Funds and Banks all across India. All his programmes aim to combine academic rigour with practical happenings in the field.