When we talk about liquidity in a financial portfolio, we mean how quickly you can turn your investments into cash without losing too much value. It’s easy to get to some things, like cash or a fixed deposit. It might take longer to sell things like real estate or stocks, and the market’s ups and downs could affect them.
People and businesses with a lot of money need to have enough cash on hand. It’s not just nice to have. Even if your portfolio is doing well in the long run, you still need money for everyday things, emergencies, and unexpected expenses.
An investor who has to sell long-term stocks at a loss to get cash or a company that can’t pay its suppliers on time are two examples. That’s what can happen if you don’t plan for cash flow well. You should be able to get some of your money easily, but some of it should be working hard in long-term investments. That’s where things like fixed deposits can do their job!
Understanding Fixed Deposits (FDs)
A Fixed Deposit (FD) is one of the easiest and safest ways to keep your money safe. You put a large amount of money into a bank for a set amount of time, like six months, a year, or even longer, and you earn interest on it. No matter where the market goes, the rate stays the same.
FDs are popular because they offer a good balance. They are safe, especially if you put them with a well-known bank, because your money isn’t at risk from the market. The returns are small but certain.
And even though they’re supposed to be locked in for a certain amount of time, you can still get the money if you need it. There might be a small fee for taking it out early. So, FDs quietly grow your money while keeping it safe so you can get to it when you need it.
Role of FDs in Liquidity Management
In times of market uncertainty or volatility, they act as a stable financial cushion. Unlike market-linked assets, FD returns are fixed and unaffected by market fluctuations. In other words, they are a dependable source of funds when others might be underperforming or hard to liquidate.
Planned Maturity
The best part of them is the ability to plan for maturity-based cash flows. One can opt for laddering. So, they invest in deposits with tenures like 3 months, 6 months, and 1 year. Thus, there is a stream of liquidity without locking in all their funds at once.
Emergency Backup Without Selling Risky Assets
Most banks allow premature withdrawal of FDs, albeit with a small penalty. This makes FDs a reliable emergency fund. You can access cash when needed without having to liquidate high-risk or tax-sensitive investments like equities or mutual funds.
Pairing FDs With Other Liquid Assets
FDs work well alongside other liquidity tools like:
- Money market funds
- Short-term debt funds
- Treasury bills
While these instruments offer varying degrees of flexibility and yield, FDs provide the added advantage of guaranteed returns,
Understanding With An Example
A small business might park surplus cash in FDs to earn interest while keeping funds accessible for future expenses. Meanwhile, a seasoned investor could ladder FDs, spreading them across different maturities to ensure regular cash flow without locking up all their money at once, simple, steady, and stress-free.
Conclusion
FDs are a good tool for investors who want to maintain some liquidity, thanks to being a protection against market volatility and the ability to withdraw early. If you’re looking for an FD to invest in, you can check out Kotak Mahindra Bank, with competitive interest rates; they’re truly the best bank to start an FD.