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While everyone looks at the return on their investment when choosing a product, it is also important to see how easily you can liquidate it when needed
What are the top things to factor in, while picking an investment product? “For most investors, the deciding factor is returns,” said Nitin Vyakaranam, chief executive officer and founder, ArthaYantra, a full-service robo-advisor. While liquidity is also an important factor to consider, and yet it “is the most ignored. The next most ignored factor is the concept of risk verse return,” said Vyakaranam. Mint Money takes a look at some of the popular investment products to see how liquid they are and the cost of liquidating them.
Fixed and recurring deposits
Most Indians have bank fixed deposits (FDs) in their investment portfolio. Their maturity period ranges between 7 days and 10 years.
The minimum amount that can be invested in an FD starts from Rs1,000. While FDs are popular, they are not really liquid. While you can liquidate them prematurely and get cash at short notice, you have to pay in terms of penal interest for this facility.
These penalties vary. For instance, if you have a 7-day FD, you will not get any interest upon prematurely withdrawn. If you had invested in tax-saving FDs, they are locked in for 5 years. If your FDs have a lock-in period, then premature withdrawal can only be done in exceptional cases such as death of the investor—and the bank would not pay any interest on the principal amount deposited. Usually, on premature withdrawal of most types of FDs, interest is calculated for the period you maintained the deposit; and then you pay a penalty of 0.50-1% of the FD rate.
But how much time does it take to get back the money? Customer can visit a branch or login to internet or mobile banking and get the money instantly into their linked savings account. “However, for FDs opened under joint mode of operation, it is mandatory to visit the branch, as signatures from all holders are required to be recorded,” said an Axis Bank spokesperson.
On premature withdrawal of recurring deposits (RDs), the bank calculates interest on the period for which the deposit remained with the bank, and then usually charges a penalty between 0.50% and 1% of the RD rate.
Mutual funds
Currently, the total number of retail mutual funds folios stands at around 50 million, according to Association of Mutual Funds in India (Amfi). As of December 2016, the total mutual fund asset under management stood at Rs16.46 lakh crore.
Mutual funds are one of the most liquid investments. “In terms of liquidity, mutual funds can be categorized into five types,” said Srikanth Meenakshi, co-founder and director, FundsIndia.com. “In case of regular liquid funds, you can get the money in the T+1 (the day you put your redemption request plus one working day),” he added. Some liquid mutual funds can also be liquidated using debit cards at ATMs. Robo-advisory firms FundsIndia and Scripbox offer facility through HDFC Bank Visa debit cards. To avail this facility, you invest in Reliance Money Manager Fund through them.
“In case of equity mutual funds, the settlement period is T+3,” said Meenakshi. This means, it would take three working days to get the money in your account. International equity mutual funds can take 5-10 business days for redemption, added Meenakshi.
Small savings schemes
Small savings products include post office time deposits, National Savings Certificate, Public Provident Fund (PPF), Kisan Vikas Patra and Sukanya Samriddhi Account. Compared to bank FDs, these are illiquid. “Each of these products have different withdrawal mechanisms,” said Anil Rego, a Bangalore-based financial planner. In case of PPF, you can prematurely close the account if it has completed 5 years, and the reason for closure should be medical emergency or higher education. After the seventh year , you can also do partial withdrawal. The premature withdrawal comes with a penalty—you will get 1% less interest, as applicable from time to time. For Sukanya Samriddhi Account—investment done for a girl child—partial withdrawal (50% of the total amount) is allowed when the account holder turns 18, if she needs the money for education or marriage. The account will mature after the girl child completes 21 years. Withdrawal before the she turns 18 is not allowed.
What you should know
Before investing, look beyond returns and know “what the goal is. You first look at asset allocation and then the risk versus reward aspect. It is only later that you choose a product,” said Vyakaranam. However, if you are not able to use the money when you need it, then the whole purpose of investment is lost.
“You should have financial products which are divisible. For instance, if you have invested Rs1 lakh, you should be able to liquidate Rs25,000 if that is the amount you need. This is possible with mutual funds and capital markets,” Vyakaranam added.
However, the option of liquidity should be used wisely. Don’t dip into you assets, which are meant for your long-term goals.
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