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Posted by: Uma Shashikant on Fri, Oct 1st, 2010

Ensuring Liquidity in the Portfolio

I have begun to write a column in Business Standard from today called "Capital Account" that addresses wealth management issues for the investors. The first column is on liquidity and the flexibility it provides to a portfolio. Many investors focus on return and risk in an investment and fail to understand the liquidity constraints that a product choice can impose. 

Key takeaways:

  1. Keeping 3-6 month balance in the savings account is only an emergency funding strategy. Managing for liquidity of the portfolio should focus on how flexible the portfolio is, to make adjustments for expenses and income.
  2. A portfolio should enable reducing EMIs and loans if needed. If the EMI is for the self-occupied house, there is limited flexibility to partly sell the asset or reduce the EMI.
  3. Pledging an investment to release money is the most used tool to release liquidity.  It is important to ensure that investments enable such pledging at a fair margin and rate, and at desired speed.
  4. While buying fixed tenure products, be sure that there would not be an intermittent liquidity need that will have to be taken care of at a high cost.
  5. If most of the wealth is locked in the residential property, ensure that incremental wealth is in liquid investments in open ended mutual funds, bank deposits and equity shares.

Liquidity needs careful planning and it is important to avoid trading it off for higher return or lower risk.

saran bhatnagar on Fri, Jan 14th, 2011 11:00:38 am

regarding your article in business standard today (14.1.11) about what to expect from my wealth manager. i was very happy to realise that i am basically on the right track, but regret to say that 'wealth managers' even in big banks, who ought to know better, do not. your article highlights the need for banks to move on, and provide the asset allocation service that is needed by a large and growing number of individuals, wherever they may be located. although i read the papers carefully, i do not recall anybody else who is into this segment (in the same way), and also you are providing a great service by training bright students to become wealth management professionals. i am a teacher in an mba programme in a tier II city, close to retirement, and have been in the equities market since i was 21 years old (and i have seen everything in the market), and now need a better/changed/balanced asset allocation, esp. as our economy is moving on in the business cycle/interest rate cycle. hence i realise the immense need of large number of good wealth managers in the country, and congratulate you for your pioneering work. s.d.bhatnagar

Jayant Pai on Fri, Oct 1st, 2010 4:50:07 pm

Hi Uma,Great to know you have begun writing for Business Standard. I will go through the article. Here is the link to my article which appeared last Sunday :

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