Are You Liquid Enough For a Rainy Day?

20 Apr 2023

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Liquidity is the ability to turn an asset into cash easily, quickly and at a relatively low cost. It plays a huge role in one’s financial portfolio as it helps ward off unforeseen financial hardships.

What is Liquidity Ratio

The Liquidity Ratio is a measure of the investor’s liquid assets as a percentage of his total net worth.

Liquidity Ratio = Liquid Assets / Net worth

Liquid assets include all cash (near cash assets), stocks, open-ended equity mutual funds (but not those with a lock-in like Equity-¬Linked Savings Schemes / ELSS) open-ended debt funds

The ideal liquidity ratio is 15% i.e. at least 15% of one’s portfolio should be redeemable immediately to meet exigencies.

For e.g. if an individual owns liquid assets worth Rs 1 crore and has total net worth of Rs 6 crores, his liquidity ratio = 1 crore / 6 crores = 16.67% which signifies healthy finances.

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