Thursday, October 27, 2011

Holding too much cash? Better financial returns without losing liquidity!

Their home loan was fully repaid within three years. They have a substantial amount invested in mutual funds and have sufficient life insurance cover. Besides, there's about Rs 8 lakh in their savings bank accounts. One would think that Animesh and Neeti Singh have managed their finances very well. Or have they? Financial experts would not agree because they hold way too much cash.

The Delhi-based couple is not an exception. Many of us, especially young earners, are good savers, but we like to stash our cash in the safety of a bank account. The RBI figures show that Indians are sitting on cash and deposits worth over Rs 6,00,000 crore. Some are in the wait-and-watch mode because they are not sure when and where to deploy the money.

"Many investors read of an investment (say, infrastructure funds) losing money and then extrapolate it to the entire investment class (equity mutual funds). They prefer to stay in cash rather than invest," says financial planner Lovaii Navlakhi.

Others are unaware of the alternative short-term avenues, where they can park the money to earn higher returns than a savings bank account without compromising on liquidity. "Distributors are also transaction-oriented and usually won't recommend options in which they don't earn anything," says Navlakhi.

Some of us let the cash idle in the bank because it may be required in the short term. "In the current scenario, many savers keep looking for the best rate for guaranteed returns and hold on to cash expecting the interest rates to go up. But you never know when the tide will turn," says financial planner Kartik Jhaveri.

Of course, some of us are just plain lazy. "It isn't just the small investors, but even HNIs are sitting on too much cash. I have known NRIs who have $1,00,000 in the bank because their child is supposed to join college in four years," says Navlakhi.

Can too much cash be a bad thing? The answer is 'yes' and 'no' depending on how much money you are sitting on, where it is parked and why you are holding it. Let's consider how you can manage it better.

Cash and your portfolio

Everybody needs to keep cash in hand. Besides paying for our daily expenses, we may need it for unexpected developments. The extent of liquidity one needs depends on the personal situation. For instance, someone with a large family will have to maintain a bigger emergency fund than a working couple with no kids. The retirees' needs would be very different from someone who has just started out in his career.

At a more strategic level, cash allows an investor to control the risk in his investment portfolio. By holding a percentage of your portfolio in cash, you can take advantage of investment opportunities as they emerge. For instance, a sizeable cash allocation may come in handy if equity markets tank and you want to rebalance your portfolio by allocating more to stocks. The cash portion can be replenished when the markets rise.


While the need for a cash cushion cannot be stressed enough, the problem is that many of us hold much more than is needed for our short-term needs. "Many investors do not know what their regular expenses are. They may be spending at random and letting their savings idle. For such investors, budgeting is of utmost importance to figure out how much cash they really need," says Navlakhi.
Source : ET

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