If you want your money to make more money for you while also keeping it accessible, you may want to consider liquid investments. This type of investment allows you to continue building your wealth without the restrictions of other types of investments where your funds are inaccessible. This could be a great option to place your emergency funds. Liquid funds, besides being easily converted to cash (if they were not in the form of cash in the first place), could be something worth looking into for those surveying long-term investments, as they do not lose value over time.
First of all, what are liquid investments? They are basically funds available in either cash or commodities that can be easily converted to cash. Bear in mind that these do not include property, vehicles, jewellery, and such commodities that are more difficult to liquidate quickly – that is, take a longer time to sell off and gain cash. So, what are liquid funds then? In terms of investments, liquid funds are things that you invest in with a short-term maturity, which can be quickly converted to cash, such as mutual funds, stocks, and bonds. Where physical commodities lose their value over time, liquid funds are essentially equivalent to cash, as they retain their value over time.
Now that you have got a gist of what it means, you may wonder how liquid funds work. The process is pretty simple. Similar to banks, when you deposit an amount into a fixed deposit account, the bank invests your money into opportunities that mature short-term. As a result, you get a small percentage added to your fixed deposit. Liquid investments will invest your money in these short term, low-risk portfolios that give you a small gain. On average, these investments mature in about 90 days. As liquid funds primarily focus on investing in short-term securities, their market value does not fluctuate with the changing interest rate, making them a less volatile asset to invest in.
There are several different types of liquid funds to consider, such as:
1. Cash and cash equivalents
Liquidity: Very high
Cash is definitely the most liquid asset, as it can be used to purchase anything, and also doesn’t require a transaction to exchange it to a usable form.
2. Stocks
Liquidity: High
Stocks can be purchased and sold for cash almost at a moment’s notice, earning them quite a high rate of liquidity.
3. Mutual funds
Liquidity: High
As mutual funds can only be traded when the markets close, they are not as liquid as the other assets listed, but they can be liquidated for cash rather fast and easily.
4. ETFs
Liquidity: High
ETFs trade easily, thus are quite liquid.
5. Foreign currency
Liquidity: Very high
Being cash, foreign currencies are highly liquid. Granted, you would need to exchange the currency, but it is still highly liquid.
If you are wondering what the most liquid type of investment is, it is undoubtedly cash/cash equivalent, along with the foreign currency. However, it depends on your investment plans. There are many articles on how to invest in liquid funds online that you could research before taking the next step in investing.
A liquid investment would be something to consider for those who what returns in a short term, or for those who want to keep contingency funds for a rainy day, as liquid investments present the lowest risk portfolios.
For those who are considering other types of investments, head over to our blog for handy investment tips and tricks.
References:
- https://www.businessinsider.com/liquid-assets
- https://www.forbes.com/advisor/investing/liquidity-and-liquid-assets/
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