|
Harish Rao of Simple Equation feels that liquidity
is the most important attribute that is unfortunately often overlooked in
investment selection.
 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 this 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 overlooked many a time?
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
a medical emergency, to purchase a consumer durable or to enjoy a holiday. Our
assets and investments need to do give us the money to meet the essential
financial requirements of 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 has he 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. At their peril. What is the use in buying a great plot
of land, when it cannot fund the by-pass surgery of the client’s father at the
right time or having a beautiful diamond necklace when it cannot fund the US
education of the client’s son? In your experience, you would have come across
similar situations when your clients have had to turn to other – more liquid
options.
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.
Speak to your clients about liquidity
today. It’s mighty important.
|