A liquid asset does not lose its value and can easily be converted into cash within a limited time frame. Factors that determine what liquid assets are, include how established the market is, how easy it is to transfer ownership, and the length of time it takes for the asset to be sold. It is a commonly used asset by consumers and businesses. let’s know Liquid Assets.
Liquid assets are:
- Cash
- Mutual Fund
- Stocks
- Exchange-traded fund
- Accounts receivables
Cash
Cash is the most liquid asset which can be easily used as a legal tender to purchase goods and services and settle liabilities. Your cash can be easily accessed through ATMs, your checking, or your savings account.
Mutual funds
Mutual funds operate by pooling funds together from different people and investing them in stocks, bonds, and other securities. They are professionally managed investments and one major advantage of mutual funds is the diversification of assets. Some examples of mutual funds are
- Money market assets
It is a mutual fund that invests in short-term instruments with minimal credit risks. Examples of money market assets are:
- Certificates of deposit which holds a fixed amount of money for a fixed period
- US Treasury bills are usually issued by the US treasury and have a maturity term of one year or less.
- Fixed income funds
- Bonds are debt instruments and fixed income securities issued by the borrower to the lender usually for a fixed term and interest is paid within the term. They are fixed income instruments representing a loan and issued mostly by Governments and corporationstions. Bonds can be treasury, savings, agency, municipal or corporate.
- Equity funds are dividend yield funds, value, funds, and focused funds
- Balanced funds
- Index funds
- Specialty funds
- Funds of funds
Stocks
Stock represents the ownership of a fraction of a company’s assets. When you buy stocks, you acquire shares in a company and you become a shareholder. You can buy and sell your shares at any time as the stock market has a lot of buyers and sellers who trade using electronic markets publicly listed equity security. Some examples of stocks are Johnson & Johnson, Alphabet, Mastercard, and even cryptocurrencies.
Exchange traded fund (ETF)
Exchange traded funds are easy to own and trade and can be bought and sold on the stock exchange. They trade on exchanges tracking a specific index or sector. EFTs, lower operating costs, and investors have access to certain asset types that ordinarily will be difficult to access like real estate. They provide investors with liquid products which are more tax-efficient. Some examples are:
- Currency funds
- Real Estate funds
- Commodity funds
- Specialty funds
- Fixed income funds like ETF bonds
- Equity funds
Account receivables
These are monies owed to a business for goods supplied or services rendered which have not been paid for. They are usually considered liquid assets because the money is expected to be paid in a year or less. If however the money is not paid back by the client it is written off as a bad debt or expense.
Advantages of having liquid assets are:
- It can easily be converted to cash to meet your financial obligations
- In business, it measures the strength of your business as it indicates to potential investors and creditors your company’s worth.
- It is always good to have liquid assets in case you encounter financial hardships, expenses, or emergencies and need cash fast
- Less risky as it can be sold quickly in times of market emergencies
- It has investment benefits as you can use them for further investments
- Used mostly by senior citizens that invest in post office savings schemes and can easily get access to the money when they need it without penalties
- Good return on investment
Some of the drawbacks of having liquid assets are:
- There is no guarantee as they are mostly market-related
- Usually subject to capital gains tax
- Management fees
Non-liquid assets are difficult to liquidate easily and they include equipment, real estate, vehicles, art, and collectibles.
Difference between a liquid asset and a non-liquid asset
- Liquid assets are easy to convert to cash and non-liquid assets are difficult to easily convert to cash
- Liquid assets maintain their value while non-liquid assets can lose their value upon liquidation
- It contributes to your financial wellness
Summary
Liquid assets can be easily converted to cash without any loss in value. It must be easy to transfer its ownership in a short frame of time too. Besides providing a good return on investment, It is always important to have liquid assets as it is easy to access in times of emergencies.
FAQ
What are the most liquid assets?
Bank notes and checking accounts
What kind of asset is gold?
Gold is a liquid asset
Are mutual funds and exchange-traded funds the same?
They are similar but not the same. Mutual funds can be bought at the end of the day while exchange-traded funds can be bought daily.
