Liquid vs illiquid money
Liquid money can be turned into cash quickly at close to its value; illiquid money takes time or accepts a cost.
Liquidity describes how quickly and cheaply something can be turned into cash. Money that is liquid can be reached within a short time at close to its stated value. Money that is illiquid takes longer, or costs something, to reach.
A spectrum, not two boxes
Cash in a bank account is the most liquid. A liquid or overnight type of debt fund is usually close behind. Shares and equity funds can usually be sold quickly, but their price on the day of sale may be lower than expected. Fixed deposits can often be broken early, though a penalty may apply. Retirement accounts, some savings schemes and property are far harder to reach, either because rules limit withdrawals or because a sale takes time to arrange.
Why it matters
A portfolio can be large and still leave a household short of cash at a bad moment, if most of it is tied up. For that reason, people often look at two numbers together: the total value, and the part of it that is liquid.
Months of expenses covered
One way to describe liquidity is in months. Add up the liquid assets, divide by monthly spending including loan instalments, and the result is how many months of expenses those assets would cover. Each household can set its own target for this figure, since needs differ with job stability, dependants and other income.
How Mandala shows this
Each holding in Mandala carries a liquidity profile, and holdings can be put in a sequence showing which would be reached first in a cash need. The Liquidity tab lists them in that order. An Emergency Fund card at the top counts the liquid holdings, compares them with monthly expenses plus any instalments, and shows the months covered against a target the user sets. It also shows the gap in rupees and which holdings were counted.
Points to keep in mind
- Liquidity is about speed and cost, not about whether an asset is valuable.
- The same asset can be liquid in one situation and not in another, for example during a market fall.
- A figure like months covered is only as accurate as the expenses entered.
What level of liquid money suits a household depends on its own circumstances.
See it live in Mandala
Related reads
Educational content only, not investment advice. Examples are illustrative, and nothing here is a recommendation to buy, sell or hold any product. Investments are subject to market risks.