Summary of this article
Investors should view cash as a form of liquidity in their portfolio, as a part of their emergency fund. It should play a supporting role in long-term wealth creation, not become a substitute for investing.
Investors sometimes feel they can hold higher levels of cash during market uncertainty, but this is not an ideal strategy as this can erode long-term wealth creation.
Investors should have three baskets for long-term, medium-term and short-term goals, while the emergency fund is a separate safety basket meant only for unexpected needs.
Investing is simple: Just keep your money invested. The difficult part is staying invested. When markets become volatile, investors feel the urge to “get to cash” and wait for the storm to pass. However, liquidity plays a vital role in one’s portfolio. While it is good to have some cash on hand, too much can be detrimental to your wealth.
The key, therefore, is to strike the right balance: keep enough money readily available to meet emergencies and avoid selling investments at the wrong time, while ensuring that excess cash continues to work towards your financial goals.
Says Arjun Guha Thakurta, executive director, Anand Rathi Wealth: “Investors should view cash as a form of liquidity in their portfolio, as a part of their emergency fund. It should play a supporting role in long-term wealth creation, not become a substitute for investing. During volatile cycles, the biggest benefit of having enough liquidity is that investors do not have to sell long-term investments at the wrong time.”
Hence every investor should build an emergency fund covering around 6-8 months of essential expenses. This provides that cushion and helps investors deal with any unexpected events, such as job loss, medical emergencies, or other costs without disturbing their core portfolio.
“But one important aspect to note is that the emergency fund should not sit entirely in a savings account. Of the total emergency corpus, only around one month of essential expenses should be kept in the savings account for immediate access, and the remaining amount should be kept in liquid or low duration debt funds so that the money remains accessible while earning a higher return,” says Thakurta.
Investors sometimes feel they can hold higher levels of cash during market uncertainty, but this is not an ideal strategy as this can erode long-term wealth creation.
Inflation running at even 5-6 per cent annually means idle cash loses real purchasing power every year. Hence the key is for investors to continue their systematic investment plans (SIPs) through volatile periods and build the emergency fund alongside their investments, rather than pausing everything until the buffer is fully in place.
“The main point is that investors should ensure their overall portfolio remains aligned with their long-term strategy. Investors should have three baskets for long-, medium-, and short-term goals, while the emergency fund is a separate safety basket meant only for unexpected needs,” says Thakurta.
Volatility should be viewed as a normal part of market cycles, while liquidity is simply the tool that allows them to stay invested without being forced to exit at the worst possible time.
