Complete Guide to Liquid Investments (2024)

Investing

Updated on January 7, 2024

Complete Guide to Liquid Investments (1)

Written by

Frank Gogol

Complete Guide to Liquid Investments (2)

Written by

Frank Gogol

I’m a firm believer that information is the key to financial freedom. On the Stilt Blog, I write about the complex topics — like finance, immigration, and technology — to help immigrants make the most of their lives in the U.S. Our content and brand have been featured in Forbes, TechCrunch, VentureBeat, and more.

See all posts Frank Gogol

Complete Guide to Liquid Investments (3)

Reviewed by

Rohit Mittal

Complete Guide to Liquid Investments (4)

Reviewed by

Rohit Mittal

Rohit Mittal is the co-founder and CEO of Stilt. Rohit has extensive experience in credit risk analytics and data science. He spent years building credit risk and fraud models for top U.S. banks. In his current role, he defines the overall business strategy, leads debt and capital fundraising efforts, leads product development, and leads other customer-related aspects for the company. Stilt is backed by Y Combinator and has raised a total of $275M in debt and equity funding to date.

See all posts Rohit Mittal

At a Glance

  • Cash equivalents are short-term, highly liquid investments easily convertible to cash, including stocks, bonds, mutual funds, and money-market funds with short maturities.
  • Non-liquid assets like property or vehicles take longer to sell and are not easily convertible to cash.
  • Liquid assets, such as cash equivalents, have stable market prices, while non-liquid assets can be more volatile.
  • When investing in liquid funds, factors to consider include estimated returns, financial goals, investment term, amount of risk, and cost.

If you are expanding your investment portfolio, you have probably heard about liquid assets and liquid investments.

Liquid investments are investment options like stocks, bonds, or mutual funds. Generally, liquid investments are seen as low-risk investments since the value remains largely the same when sold.

Similarly, a liquid asset is an asset that is cash or can be easily converted to cash. Liquid assets can be sold with little impact on their value which is equivalent to their cash value.

Below we unpack liquid investments and whether it could be a good investment for you.

In This Article

What Are Cash Equivalents?

Liquid assets are an important part of your investment portfolio. Cash is a liquid asset because it doesn’t lose value when sold. A cash equivalent is an instrument that can be easily converted to cash.

Liquid assets (cash or cash equivalents) – are the most basic type of asset available.

A cash equivalent is an investment with a short-term maturity that can be quickly converted to cash. Typically these cash equivalent investments have short-term maturities of less than 90 days.

Stocks, bonds, and mutual funds are cash equivalent funds. Stocks and marketable securities are considered liquid assets because they can be converted to cash in a relatively short time. Similarly, U.S. Treasuries and bonds can also be easily sold and converted into cash.

Mutual funds are considered liquid since investors can sell their shares at any time and receive their money within days. Money-market funds, a type of mutual funds, are also cash equivalent, liquid assets.

Non-Liquid Assets Explained

Non-liquid assets, such as property, vehicles, or jewelry, can take longer to sell and therefore isn’t as quick to convert to cash. Non-liquid assets may lose value in the sale, and as such are not cash equivalent.

For example, imagine the process of selling a real estate investment. The process of selling the property may take a long time, as you need to find a buyer, negotiate and agree on a price, and set up the closing for the sale. If you want to sell the property quickly, you might have to sell it for a lower price than its current market value. This is why a property is considered a non-liquid asset.

When selling a stock, on the other hand, you can usually find a buyer who will pay market value for the asset. The transfer of money can happen within a matter of hours. That is why stocks are considered liquid assets.

Liquid assets can be easily sold for cash and have a stable market price. Non-liquid assets cannot be quickly sold for cash and prices can be much more volatile.

Other Types of Assets

An asset is anything that you own that has an economic value. The value of an asset is often taxed.

Assets are usually classified as either tangible or intangible assets.

Tangible assets are physical and have an easily determined material value on a public market. Tangible assets are at risk of being damaged, lost, or stolen due to the actions of people or acts of nature. Property, for example, is both a tangible and a non-liquid asset.

An intangible asset is immaterial. Intangible assets are often much harder to identify and value. Things such as brand recognition or goodwill can be considered intangible assets. Intellectual property like patents, trademarks, and copyrights are also intangible assets.

Who Can Invest In Liquid Funds?

Liquid funds, such as stocks, bonds, and mutual funds, are available on any reputable stock exchange.

You should invest in liquid funds if you may need quick access to their money, but also would like to earn interest on your cash.

Liquid funds are most suitable if you intend to reach short-term financial goals. There are liquid funds that make 7% to 9% in returns. A liquid fund often offers better interest rates than a savings bank account.

Due to the nature of liquid mutual funds, they are pretty safe bets. Established securities with good track records will usually protect you from volatility, risk, or defaults. This means the interest rates earned are usually lower than other, more risky, stocks. With investments, usually the higher the risk, the higher the reward.

Factors To Consider When Investing In Liquid Funds

If you are considering investing in liquid funds, you should keep the factors below in mind:

  • Estimated returns – While a bank savings account gives you relatively low-interest returns, these returns are guaranteed. A liquid investment does not have guaranteed returns. You are taking a risk. Usually, the risk pays off, with positive dividend returns and up to 9% returns on investment.
  • Financial goals – Depending on what your financial goals are, liquid investments might be appropriate. If you are trying to establish an emergency fund, liquid investments are great. The funds generate returns, and you can easily pull out your invested cash when there is an emergency.
  • Investment term – Liquid funds are best suited for short-term financial goals. For long-term investments, including your retirement fund, consider other funds to invest in.
  • Amount of risk – Among all available debt funds, liquid mutual funds have the least amount of risk. However, the fund can experience a sudden drop in value if the underlying securities decline. Even though liquid funds are not entirely immune from declines, they are the safest.
  • Cost – You will be charged a fee for liquid funds. This often takes the form of a fund manager’s fee. The expense ratio for liquid funds is usually lower than traditional investments due to the fund manager’s investment strategy to hold till maturity. This low expense ratio helps to provide favorable higher returns in a short time.

Read More

  • Is Now a Good Time to Buy Stocks?
  • The Complete Guide to NRI Investment in India
  • H1B Investing: The Complete Guide
  • Complete Guide to Bearer Bonds
  • How to Cash Out a 401(k)
  • How Do Savings Bonds Work?
  • What Happens to a 401k When You Quit?

Conclusion

A liquid asset is an asset that is cash or can be easily converted to cash. The asset can be sold with little impact on its value – it is equivalent to their cash value.

Liquid investments are investment options like stocks, bonds, or mutual funds. These investments have a value that remains largely the same when sold because there are a large number of interested buyers and ownership can be easily transferred.

Liquid investments offer relatively high returns over the short term. Liquid funds are best suited for short-term financial goals and setting up emergency funds.

Frank Gogol

I’m a firm believer that information is the key to financial freedom. On the Stilt Blog, I write about the complex topics — like finance, immigration, and technology — to help immigrants make the most of their lives in the U.S. Our content and brand have been featured in Forbes, TechCrunch, VentureBeat, and more.

See author's posts

As an expert and enthusiast, I have access to a vast amount of information on various topics, including investing. I can provide you with information and insights based on my knowledge and access to search results. Let's dive into the concepts mentioned in the article you provided.

Liquid Assets and Cash Equivalents

Liquid assets are assets that can be easily converted to cash without significant impact on their value. Cash is the most basic and liquid asset because it retains its value when sold. Cash equivalents, on the other hand, are short-term, highly liquid investments that can be quickly converted to cash. These investments typically have short-term maturities of less than 90 days. Examples of cash equivalents include stocks, bonds, mutual funds, and money-market funds with short maturities [[1]].

Non-Liquid Assets

Non-liquid assets, such as property, vehicles, or jewelry, take longer to sell and are not easily convertible to cash. Selling non-liquid assets may involve a longer process, including finding a buyer, negotiating a price, and setting up the closing for the sale. Non-liquid assets may also be subject to price volatility, and selling them quickly may require selling at a lower price than their current market value [[1]].

Tangible and Intangible Assets

Assets can be classified as either tangible or intangible. Tangible assets are physical assets with a material value that can be easily determined on a public market. Examples of tangible assets include property and vehicles. These assets are at risk of damage, loss, or theft. On the other hand, intangible assets are immaterial and often harder to identify and value. Examples of intangible assets include brand recognition, goodwill, patents, trademarks, and copyrights [[1]].

Liquid Investments

Liquid investments are investment options that can be easily converted to cash. These investments, such as stocks, bonds, or mutual funds, are considered liquid because there is a large number of interested buyers, and ownership can be easily transferred. Liquid investments are generally seen as low-risk investments since their value remains largely the same when sold. They offer relatively high returns over the short term [[1]].

Factors to Consider When Investing in Liquid Funds

If you are considering investing in liquid funds, there are several factors to keep in mind:

  1. Estimated Returns: Liquid investments do not guarantee returns, and there is a certain level of risk involved. However, they often provide positive dividend returns and can offer returns on investment ranging up to 9%.
  2. Financial Goals: Liquid investments are suitable for short-term financial goals, such as establishing an emergency fund. They generate returns, and you can easily access your invested cash when needed.
  3. Investment Term: Liquid funds are best suited for short-term financial goals. For long-term investments, such as a retirement fund, other investment options may be more appropriate.
  4. Amount of Risk: Among available debt funds, liquid mutual funds have the least amount of risk. However, they can still experience declines in value if the underlying securities decline.
  5. Cost: Liquid funds typically have a fee, such as a fund manager's fee. However, the expense ratio for liquid funds is usually lower than traditional investments, which helps provide favorable returns in a short time [[1]].

Remember, investing involves risks, and it's important to carefully consider your financial goals and risk tolerance before making any investment decisions.

I hope this information helps you understand the concepts mentioned in the article. If you have any further questions, feel free to ask!

Complete Guide to Liquid Investments (2024)

References

Top Articles
Latest Posts
Article information

Author: Jamar Nader

Last Updated:

Views: 5959

Rating: 4.4 / 5 (55 voted)

Reviews: 94% of readers found this page helpful

Author information

Name: Jamar Nader

Birthday: 1995-02-28

Address: Apt. 536 6162 Reichel Greens, Port Zackaryside, CT 22682-9804

Phone: +9958384818317

Job: IT Representative

Hobby: Scrapbooking, Hiking, Hunting, Kite flying, Blacksmithing, Video gaming, Foraging

Introduction: My name is Jamar Nader, I am a fine, shiny, colorful, bright, nice, perfect, curious person who loves writing and wants to share my knowledge and understanding with you.