Aren’t sure what they are?
No problem. In fact, that’s why we are here today. It is not so easy to have grasped on all terminologies especially those which are small yet quite important. In financial language, “it can be described as an asset which can be easily converted into cash with minimum impact to the received price.”
In more simple language, “things that can be sold within seconds at fair market value.”
The best example to describe this is the cash we have in our hands considered as a liquid asset. Cash which comes under our national currency and use as an official medium of payment by law to meet a financial obligation. The money exists in our saving or money market accounts which we use to settle current liabilities is considered liquid because it can be withdrawn easily.
Now, we believe you’ve got pretty much idea about –
What are liquid assets exactly?
And what they use for?
So, let’s find out what are those liquid assets.
Cash equivalent investments that have short-term maturities of not more than 90-days are referred as liquid assets because these investments can be easily converted into cash.
- Treasury Bills and other Government Bonds
- Stocks are financial assets or you can say paper assets which can easily convert into cash in a short period of time. Sure, you must be familiar with the liquidity of stocks and know how easy it is to get cash out of stocks.
- A mutual fund is another good example of liquid assets which are more like a managed portfolio of investments where market investors can sell their stocks at any time in the state of financial emergency and get cash within few days. (See more: Buy Mutual Funds on Paytm)
Note: – Money-market funds are also considered as a liquid asset. These are one of the types of mutual fund. The best example of money-market funds is municipal bonds.
Now that you got the clear view on the type of liquid assets, it is also important to differentiate non-liquid assets/fixed assets from liquid assets.
And why non-liquid/fixed assets are so hard to liquidate and convert into cash?
Real estate investments are a non-liquid asset type. To understand it clearly, let’s assume you have a real estate property which you wants to liquidate or sell for financial emergency or pay off a debt. Unlike stocks, you can’t just liquidate your financial asset. In fact, you will require an investor to discuss and negotiate the price of the property and set up closing for the sale. If we take that all into the account, then no doubt, it will take more than a month to get hands on the money. Plus, trying to sell property quickly will automatically reduce its market price and might sell at lower than the current market price. Worse, you could suffer from a loss.
Final Thoughts: –
It is clear that liquid assets are quite reliable when it comes of paying off debt or urgent requirement of cash. But, don’t get too overconfident for having liquid assets in your portfolio because even cash equivalent has flaws.
Hope, this article will help you to get the clear image of liquid and non-liquid assets. For any queries, you can message in the comment section given below.