While working with a pharmaceutical multi-national company in India in 2013, Mumbai-based 42-years old Rupali Kalav bought a flat in Navi Mumbai for Rs 58 lakh using home loan. At that time, it was a lucrative investment as other investors were making returns in 16% to 18% range on their real estate investments. Tax savings with home loans were further sweetening the deal.
However, things changed over a period of time. Demonetisation and structural slowdown on account of massive supply made the real estate market dull.
Two years ago, when Rupali took entrepreneurial plunge in brand communication and marketing technology, the reality hit her hard. Her unpredictable business income made timely repayment of equated monthly instalment difficult. When she decided to sell the property in February 2017, she found it difficult to sell.
Rupali Kalav says, “Over the period of loan tenure, I am going to pay almost double the price it was quoting at. And the market is so bad that prospective buyers are willing to offer only Rs 55 lakh.”
A point to note, her adventure in ‘real estate investing’ accounts for more than 70% of her investments.
Importance Of emergency cash
Inability to liquidate your investments at fair price can be a big problem.
“Many times investors are keen to invest for ten years or more at the time of preparing of financial plan. But life throws its own challenges. And despite maintaining emergency funds, investors may be forced to withdraw their investments aimed at long-term financial goals,” says Gajendra Kothari, managing director and CEO, Etica Wealth Management.
If we dig deeper into the portfolios of individuals we would come across many instances of ignoring liquidity which leads to loss of peace of mind.
Some do maintain cash or bank balances just enough to take care of recurring monthly expenses, but overlook non-monthly and unavoidable expenses such as – donations, school fee payments, car servicing costs, hospitalisation.
“It is better to address the liquidity need by maintaining an emergency fund equal to at least six months of expenses. Otherwise, one may be forced to sell his long-term investments to pay for his daily needs,” says Pankaj Mathpal, founder and CEO of Mumbai based Optima Money Managers.
Once you align cashflows with your needs, rest of the money can be invested in such a manner that your financial goals are achieved. For example, if you are in high tax bracket – say 30% and keen to invest for a goal due three years from now then it is better to employ mix of fixed maturity plans (FMP) and short-term bond funds. Even if you want to lock in interest rates, do not go overboard with FMP.
Putting all your money in FMP hands you over an illiquid portfolio. You may have planned it well, but always keep some of your investments in liquid vehicles as they can be used to overcome any unforeseen emergency.
Does liquidity come at a cost of high returns?
Many investors get carried away with low fund management expenses charged by exchange traded funds (ETF). But most of them are rarely traded at fair value on Indian stock exchanges. A look at past one month’s data reveals that out of 64 ETFs traded on National Stock Exchange, 37 ETFs have recorded average trading volumes below 5,000 units per day.
If you have accumulated large quantity of an ETF, you may find it troublesome to monetise it.
Same is the case with sovereign gold bonds. Many of them quote at 10% to 15% discount to their fair value. If one can hold on to them till maturity then they can be very good means to invest in gold.
An asset class that is out of favour typically suffers from liquidity. But when the same asset class starts generating returns, it also attracts more investors and brings back volume-driven liquidity. For example, if gold continues its journey up, one may see increased volumes in SGB and it may further lead to decrease in discount to fair value of SGB in secondary market.
“Never look at liquidity at a given moment of time. You should look at expected liquidity,” says Ramalingam K, founder and CEO, Holistic Investment Planners.
While mutual funds are good to invest in stocks, one should go slow on ELSS. Avoid investing in more than what is required for tax shelter in ELSS. Most investment experts also highlight that unit linked insurance plans (ULIP) come with a minimum term of five years and one may benefit only in the long term. “ULIPs score low on liquidity and hence we do not recommend it to our clients,” says Ramalingam.
Liquidity or lock-in: how to choose?
That’s the dilemma. If you tilt a lot towards liquidity, you could end up sacrificing returns. But investments that are designed to benefit over the long run, come with lock-ins.
For example, National Pension Scheme (NPS) is gaining investor attention because one can better manage tax at the time of superannuation and also get regular income. It also gives tax benefit at the time of investing. Low fund management charge and solutions such as lifecycle investing make it even more attractive.
But it is an illiquid investment. Before reaching 60 years of age, you can only make three partial withdrawals if you have been a subscriber for at least three years. You are allowed to withdraw up to 25% of your contributions (not accumulated amount). Also such withdrawals are allowed for specified reasons such as higher education and marriage of children, buying of residential house and treatment of critical illness.
Some apparently illiquid avenues can be tapped in smart ways. For example, PPF comes with a 15 year tenure. The biggest advantage of PPF account is you need not commit an investment of a fixed sum in each year while opening an account. You can start with Rs 500 and keep investing small amount of money each year when you are running short of money. As you grow this, PPF account can be utilised to your advantage.
“Before you invest your money, you have all the choices. But once you invest, your investment shall dictate the choices,” says Vivek Rege, founder and CEO of V R Wealth Advisors.
Can you sell your investments in part? That is another way of looking at liquidity. When you invest in an equity mutual fund, you can sell some units or you may choose to exit altogether. But can you sell half a property?
“Property should not account for more than 50% of your total investment portfolio,” says Gajendra Kothari. “As you approach retirement, bring down your exposure to real estate typically towards 25% as it is difficult to maintain these physical investments in old age.”While returns and risk remain the pillar of investment decision making process, do not ignore liquidity.