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How to Assess Liquidity Before Making Any Investment
Jun 20
3 min read
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It’s not just about returns. It’s about how quickly you can access your money without regrets.
A business owner once shared:
“I invested ₹10 lakhs in a corporate FD with 3-year lock-in. A cash crunch hit, and I had to break it early—with penalties and paperwork.”
Another put surplus funds in a market-linked debenture.
“Looked great on returns. But when I needed cash mid-project, I found zero buyers in the secondary market.”
Liquidity isn’t an afterthought.
It’s a critical filter you must apply before you invest—especially when running a small or medium business with variable cash flow needs.
Let’s walk through how to assess the liquidity of any investment—so your money is ready when your business needs it.
Step 1: What Is Liquidity, Really?
Liquidity = How quickly (and easily) you can convert an asset into cash without losing significant value.
A good investment is not just about growth—it’s about accessibility when needed.
Evaluate liquidity on three fronts:
Speed: How fast can I exit or redeem?
Cost: Will I pay a penalty or exit load?
Market: Is there a buyer if it’s not redeemable?
Step 2: Classify Investments by Liquidity
Here’s a simplified framework:
Instrument Type | Liquidity Level | Typical Access Time |
Savings Account | Very High | Instant |
Sweep-in FD | High | 1–2 days |
Liquid Mutual Fund | High | T+1 (next day) |
Ultra-Short Debt Fund | Medium-High | T+1/T+2 |
Corporate FD (Lock-in) | Low | Locked or penalty |
Listed Bonds | Medium | Tradable if buyers exist |
Real Estate | Very Low | Weeks to months |
PPF / NPS | Low | Only partial/after tenure |
When planning investments, align instrument liquidity with capital purpose.
Step 3: Match Liquidity to Business Use Cases
Use this rule of thumb:
0–3 months use (payroll, vendor payments):
→ Savings, sweep FDs, liquid funds
3–12 months reserve (working capital buffer):
→ Ultra-short funds, short-term bonds, recurring FDs
1–3 year surplus (no expected use):
→ Corporate bonds, hybrid mutual funds, long-term debt
3+ years surplus (strategic investing):
→ Equity funds, REITs, real estate (with caution)
The mistake most businesses make?
Locking money into long-tenure instruments based on promised returns—without checking access needs.
Step 4: Read the Fine Print on Exit Terms
Before investing, ask:
What is the minimum holding period?
Is there an exit load or penalty?
Is redemption done at NAV or market price?
For bonds: is there secondary market liquidity?
If you're using platforms (Groww, Zerodha, etc.), check for instrument type—not just the projected return.
Step 5: Build a “Liquidity Ladder”
Divide your investments into:
Tier 1: Can access in 0–7 days
Tier 2: Can access in 1–3 months
Tier 3: Locked for 1+ years
This ladder ensures:
✅ Business continuity
✅ Strategic investing
✅ Zero panic during dips or delays
Your investment portfolio should mirror your cash flow cycles.
TL;DR – Too Long; Didn’t Read
Liquidity = how fast and easily you can access your money without penalties or value loss.
Always check speed, cost, and exit options before investing.
Match investment tenure to business cash flow cycles.
Don’t lock all surplus into long-tenure products chasing returns.
Build a liquidity ladder—some cash should always be within reach.
Your business thrives on momentum.
So your money should never be stuck in molasses.
Because a good investment isn’t just about growing wealth.
It’s about being useful when it matters most.
