Investments like purchasing a property are great! But what’s not so great is the process and the time it takes to make that investment yours.
Fortunately, liquid investing can help counter this issue. It presents the opportunity to build your wealth while keeping your funds easily accessible.
What are liquid investments?
Liquid investments can be defined as the type of investment you can quickly and smoothly convert into cash or cash equivalents. Additionally, it shouldn’t cost you anything substantial to be converted into cash.
A useful purpose for a liquid asset is to use it to build your savings and work towards a major purchase like a car or a house; all while receiving interest in your existing investments.
It’s easy to spot the benefits of being able to quickly turn your investments into cash, but there are downsides too. One of which is that illiquid investments (assets that can’t be converted into cash) often offer higher returns after a certain maturity date.
6 types of liquid investments
The goal of liquid investing remains constant—easy access to funds when needed. But the nature of the types of investments can differ tremendously. Consider the risks and rewards associated with each option based on your set of circumstances.
What’s the most liquid asset in our era? Cash.
You don’t have to sell cash in order to use it, and you definitely don’t have to pay a fee for taking it out of your wallet.
Cash investments include banking with regular savings accounts or term deposits from traditional banking institutions.
The biggest downside of it is, of course, you won’t be making anything from these investments. Even if you do, it’s often less than 1%. It’s never going to make you rich even if you have 200 years to live.
On top of that, you’re exposed to the risk of inflation. Maybe you can buy a pack of Nasi Lemak with your one ringgit bill today, but it might not be the case in five years.
2. High-interest rate savings account
Another safe and flexible option is a high-interest rate savings account. These accounts give you a stable return on your investment and are mostly accessible, as opposed to fixed deposits.
Bear in mind as well that there may be restrictions such as your age and minimum deposits when you’re looking for the account with the highest interest rates. At the same time, a lower interest rate often comes with other benefits.
Bonds function as a form of loan. For instance, when a company or government needs cash, they have the option to issue bonds to finance the loan. The bonds give them a certain amount of money which they need to pay back at a later date (maturity).
There are several types of bonds, including government, municipal, corporate, and mortgage. As a rule of thumb, government bonds are considered the safest while corporate bonds are considered the riskiest.
In the Malaysian bond market, there are conventional and Islamic papers ranging from Government securities, Bank Negara Papers, Cagamas Papers, Private Debt Securities (PDS), and Asset-Backed Securities (ABS).
ETFs, or Exchange-Traded Funds, are public traded funds that track a specific market. That means they are more passively managed rather than actively managed. But the good thing about them is that they are inherently diverse, distributing an investor’s risks while offering exposure to a wide market.
With today’s technology, you can easily buy or sell ETFs during market opens with just a click of a button; making them a fairly liquid investment. The only trouble you might face is the process of depositing and withdrawing the funds from your brokerage account.
Similar to ETFs, stocks can also be easily bought and sold during market hours. In some cases, even outside of market hours. But one thing that separates stocks from ETFs is the volatility.
An ETF generally has lower volatility as opposed to a stock. Because of that, when an investor needs the money urgently and is forced to liquidate it, there is a higher chance that they will have to take a loss on that investment. Simply because it wasn’t the right time.
6. Money market account
Money market funds (MMFs) are a reliable financial option for managing money, though most Malaysians aren’t aware of these funds. MMFs are funds that specifically look for highly liquid short-term cash equivalents, otherwise known as “money market instruments”. These instruments all have to be supported by banks, which makes it considerably low risk, giving you high interests and have no lock-in periods.
Although liquid investments are important in one’s budget, you should also consider illiquid investments for the long-term as they provide higher potential returns.
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Meanwhile, if you're thinking of investing in stocks in the near future, here's a quick guide on the basics: