For individuals, it is important to keep the cash component of their portfolio in safe and secure instruments so that it is easily available in times of urgency.
There are a large number of unforeseen risks that a person faces on a day-to-day basis. Buying life and health insurance is one way of ensuring that you are able to manage risk effectively but there is often a need for immediate cash. Cash management, therefore, takes prime importance.
The first thing in liquidity management is managing the cash in hand. This basically constitutes of the cash that is usually kept at home for emergency. This comes handy, in case of instant hospitalisation, where you have to pay money at the time of admission.
Though the amount kept as cash-in-hand will vary depending upon the number of family members and the expected requirements. However, a minimum of Rs 25,000-30,000 is essential because it is the bare requirement in most situations. This provides an element of safety for the individual. It is very important that this amount is kept away from daily expenses and if used, replenished quickly.
Also, a certain amount in the bank savings account has to be maintained constantly for requirements that will require additional money. The basic idea is to have access to funds through an ATM card. In this respect, it makes little sense to have large amounts locked-in instruments that cannot be accessed at a short notice.
Most ATM cards allow you to withdraw between Rs 15,000 -25,000 in one day. In such circumstances, divide the money between other bank accounts for an emergency.
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For instance, if you have three accounts, but maintain all the balance in one and just keep the minimum balance in the other two. In such a situation, in case you need money that is more than the cash-in-hand and that can be withdrawn in one day, having a surplus in another account will help.
Also, sometimes the bank network could face serious problems as it happened in the Mumbai rains in 2005. Or there are times of violence like riots or other situations when an additional safety net is of utmost importance.
Of course, maintaining more bank accounts includes additional costs because of the minimum balance requirements, but that is a small price to pay for the relief that they provide during tough times.
Now that the immediate need for funds has been looked into, the attention should shift to time horizons that are slightly longer in nature. funds are also required during times when the individual might be incapacitated for some health reasons or laid-off.
This can be tackled by having in place a plan that will take into account this financial need and provide liquidity for the critical three to six months.As far as instruments go, there is a wide range of choices where the money can be parked. For instance, fixed deposits of banks, liquid funds of mutual funds or even fixed maturity plans can be used effectively for this purpose.
Through this route, the money will continue to earn some returns and still be accessed at short notice. The basic idea is to have the money available when there is a need. And in this situation, though the money comes to you in a day or so, it should not make lot of difference.
In terms of investment, it is important that the selection of the routes for investment is made properly. Safe and secure should be the first motto of the money that you keep for emergencies, the rest can used aggressively to generate returns.
The writer is a certified financial planner