Lesson from note ban and pandemic: Keep a month's expense in cash at home

In addition, have an emergency fund equal to three-six months' expense parked in liquid fund, savings account and sweep-in fixed deposits

While digital payment has grown rapidly, especially in metros and urban areas, cash remains king. The outstanding stock of currency in circulation stands at Rs 28.5 trillion currently, compared to Rs 18 trillion during demonetisation, up 58.3 per cent over a five-year period. Against the backdrop of these macro trends, what should your personal strategy for cash management be?

Experts say your cash holdings should be split into three parts: hard cash at home, cash stacked away for contingency, and cash reserves within your portfolio.

Hard cash at home

Though you may have several payment apps, cards and bank accounts, it still makes sense to keep some hard cash at home. Tarun Birani, founder and chief executive officer (CEO), TBNG Capital Advisors says, “The hard cash kept at home should equal one month’s expense, maximum two.” This amount will prove handy if banks and ATMs remain shut or frequent withdrawals aren’t possible.

There are no limits on the cash you can keep at home. “Currently, there is no official stated policy of the Reserve Bank of India or the government of India limiting the cash that can be kept at home. However, in case of an enquiry, a person will be liable to explain the source of the money,” says Chirag J Shah, managing partner, CJS Law Associates.

Contingency fund

Besides hard cash at home, you should also have an emergency fund that you can tap into. M Barve, founder, MB Wealth Financial Solutions says, “Keep some money aside in liquid instruments, which you can access quickly if you need to pay, say, a surprise medical bill. This should equal three to six months’ expenses.”

While calculating monthly expenses, include EMIs and insurance premiums, so that you don’t have to touch your long-term investments, like retirement funds, in an emergency.

Birani says, “Park your emergency funds across liquid funds, fixed deposits (FDs), and savings accounts.”

He adds that arbitrage funds are a good idea right now as they give better post-tax returns. However, it would take three-five days to redeem your money, whereas you can redeem it from a liquid fund within 24 hours.

Choose the sweep-in facility for FDs. This will ensure you get FD returns, but can access your funds immediately from your sweep-in savings or current account (linked to the FD).

Cash reserve in portfolio

Many large investors like Warren Buffett keep huge amounts of cash on hand. But should you follow that strategy? Experts hold varied viewpoints on this subject.

Jharna Agarwal, head-products, Anand Rathi Preferred says, “Invest all your funds across asset classes. If an asset class outperforms, book partial profit in it and invest in another asset class to which you are underexposed. In the rare event you keep some cash in hand for an opportunity, don’t hold it beyond six months.”

Rathi says the approach of being fully invested avoids cash drag—the underperformance that arises because the investor has not invested 100 per cent of his corpus.

Some experts believe you may hold some cash to exploit opportunities that may rise. Birani says, “Investors should follow a core and satellite approach in their portfolios. In the satellite portfolio, money is invested tactically to make the most of short-term opportunities, so you will need to keep some money in cash.” For instance, if you have booked profits in small-cap funds (held in your satellite portfolio), you may hold the money in cash until a suitable opportunity arises.

For most Do-it-yourself (DIY) investors, Barve recommends they should build an emergency fund and thereafter not allow the cash holding in their portfolios to exceed 5 per cent.