Before diving into the various liquid investments you can profit from, we need to define and understand what a liquid investment is. Before you invest in anything, you should understand everything about it – from availability to potential risk.
The most basic truth to investing: if you can’t explain an investment to a six-year-old, you don’t understand the investment yourself.
Liquid Investment Definition
In simple terms, a liquid investment, also known as a liquid asset, is any type of investment that can quickly and easily be converted into cash.
For example, a money market fund would be considered a liquid investment, or liquid asset, because it makes money from interest, but is still quickly accessible to cash out.
Real estate, in comparison, can not be quickly turned into cash because it requires the sale of the property and transfer of ownership, which can take an extended period of time.
Understanding Liquid Investments
There are various liquid investment vehicles you can invest in. Liquid assets that are cash equivalents are the most liquid and the best. It is very easy to find worthwhile offers on something that you can exchange for cash each day. This means that it is relatively easy to find liquid investments.
It is important to know that liquid investments can turn illiquid when there is pressure. During the World Trade Center attack on September 11, 2001, the New York Stock Exchange (NYSE) and the Nasdaq Composite (NASDAQ) remained closed for approximately a week, which froze liquid investments.
During the closure, investors were unable to effectively exchange and trade securities. For this reason, the majority of traditionally liquid investments became illiquid for an unprecedented period of time.
Due to volatility and investor panic, some individual sectors or securities can quickly shift from liquid to illiquid assets.
Even though some liquid investments experience extreme volatility, there are several stable liquid investments most individual investors commonly use. Some of the most common liquid assets include mutual funds and bonds.
Keep in mind, these investments do not flow in and out of your bank accounts as hard cash. However, you can sell them at the end of a trading day, even during a turbulent market. For Exchange-Traded Funds (ETFs) and individual securities, trading prices continually change, so while they are liquid assets, they are not guaranteed to hold a constant value.
Any portion of real estate you directly own is relatively illiquid. As previously stated, it is possible that selling that piece of property could take days, weeks, or months, even when the market is stable.
Defining Liquid Investments (Liquid Mutual Funds)
Liquid funds are frequently referred to as debt mutual funds that invest in treasury bills, fixed deposits, commercial papers, and other types of debt securities (investments).
To qualify as “liquid funds,” they need to be short-term investments that mature within 91 days.
A benefit of liquid mutual funds is they are not locked in. Meaning you can withdraw your funds within 24 hours upon request.
Among all the debt funds available, liquid funds usually have the lowest risk compared to their interest rates. This is because liquid funds mainly invest in securities that have fixed income and therefore mature faster.
Who Can Invest In Liquid Funds?
Investment in liquid funds is advisable for investors who need ways to store their cash, similar to saving it in a regular bank account. These should be used for people who may need quick access to their money but also would like to earn interest on their cash.
Due to the liquid nature of the investments, the interest rates earned are usually lower because the risk is less.
With investments, usually the higher the risk, the higher the reward.
Even though the risk is minimized with liquid funds, your retirement savings should be in employer-sponsored retirement investment accounts or a 401k and invested in slightly riskier investments to take advantage of compounding interest and dividends.
Liquid funds are most suitable if you intend to reach short-term financial goals. There are liquid funds that make 7% to 9% in returns, and they are better than regular savings bank accounts where interest is almost 0%.
Due to the nature of liquid mutual funds, asset allocation can protect you from volatility, risk, or defaults as long as you invest in established securities with a good track record.
Factors To Consider When Investing In Liquid Funds
Review these important concepts before investing in liquid funds.
As stated previously, liquid funds can provide 7% to 9% returns. These are significantly higher than regular savings accounts where the interest is basically meaningless. However, the liquid funds’ returns are often not guaranteed, but they can give positive dividend returns.
If your goal is to establish your emergency fund, liquid funds are very appropriate. While you should still have $2,000 or so in cold hard cash, the remainder of your emergency fund cash can quickly grow in a liquid fund. The funds generate returns, and you can easily pull out your invested cash when you want to or when there is an emergency.
Liquid funds are best suited for short-term financial goals and investing money not allocated for retirement. This target period should be approximately three months since short-term investments boost the potential of the underlying securities. For long-term investments of a year or more, consider other funds to invest in.
Among all available debt funds, liquid mutual funds have the least amount of risk. Since the underlying assets take 60 to 91 days to mature, the Net Asset Value (NAV) does not fluctuate very often. This helps by preventing the changes in the underlying asset price from impacting the NAV of liquid funds.
However, the NAV can experience a sudden drop due to the impromptu decline in the underlying security’s credit rating. Even though liquid funds are not entirely immune from declines, they are the safest.
You will be charged a fee for liquid funds, such as mutual funds, in the form of expense ratios. This fee depends on the jurisdiction. The expense ratio for liquid funds is usually lower than traditional investments due to the fund manager’s investment strategy to hold till maturity.
This low expense ratio helps to provide favorable higher returns in a short time. Normal expense ratios are between 0.5% and 1%.
Evaluating Liquid Investments
Understanding how different aspects of a fund can impact your investment is crucial to protecting your money.
How the liquid funds perform is very important when selecting the investment. We mainly invest in getting returns and funds that give consistent returns from varying prospects. Go for the funds that consistently perform better than the targeted benchmark and peer funds.
For better results, take time to review the fund’s performance and identify the one in line with your target. Review previous performance to ascertain the fund’s track record.
As previously mentioned, the expense ratio indicates the fee charged by the mutual fund. Funds with high expense ratios are not guaranteed to perform any better than those with lower fees. Pay careful attention to the fees charged because they can significantly impact your overall return.
Financial ratios vary, and they enable you to use different perspectives to analyze how a fund performs. You can use financial ratio tools such as alpha, beta ratios, and standard deviation to review the fund’s risk rate and the risk-adjusted returns.
When the beta and standard deviation of a fund are high, the fund is considered riskier. For financial ratios, choose the funds with a higher Sharpe ratio for better returns and less risk.
History Of The Fund
When selecting a fund, it’s important to look over the fund manager’s historical performance and prior investment decisions. While not necessarily a predictor of future performance, a lengthy fund history that shows good consistent performance may remain consistent compared to an untested fund.
A good fund history should deliver consistency for at least 5 to 10 years.
Liquid Funds Taxation
Taxation applies to dividends of all mutual funds. These dividends are included in your total earnings, and taxation happens according to your rate. At the end of the year, you will be sent a 1099-DIV form you must file as income.
For tax information specific to your individual situation and investments, refer to a Certified Public Accountant for advice.
Why Use Liquid Investments?
- Liquid funds have relatively low risk, and it takes 91 days or less for the underlying securities to mature
- They are a great option when you want to build up emergency savings
- They are most suitable for risk-averse investors
- Redemption of liquid funds happens quicker than traditional mutual funds
- Liquid funds are a good way to develop a diversified portfolio
Is Real Estate A Liquid Investment?
This is a commonly asked question, and it is not a yes or no answer. Depending on how you own the real estate, it can be liquid or illiquid. When you have ownership of the real estate and the market is not doing well, it may be difficult to get your money out of the property quickly.
In contrast, a real estate investment trust (REIT) is a non-publicly traded security. Depending on your contract, selling it for cash is bounded by each specific REIT’s conditions and regulations.
If invested in a traditional REIT, you may be able to sell your real estate security on a regular trading day. This is only when your real estate is in the form of marketable security like a mutual fund or ETF that capitalizes in real estate securities. This form of real estate ownership is the most liquid one.
Planning For Liquid Investments
For an investment to be considered liquid, it should have cash equivalents. You should have enough cash on hand outside of your investment to take care of immediate needs, such as a vehicle breakdown, etc.
Your budget can include adding more money into your liquid investment, but before doing this, ensure you still have cash on hand for any financial emergencies.
What Are The Different Types Of Investments?
We will cover four main available types of investments. These investments may also fall into different asset classes, and they are each unique in terms of characteristics, benefits, and risks. It’s important to understand the various types of assets and choose a good blend depending on your financial goal and risk tolerance level.
A good understanding of what you want to invest depending on your financial goals can make your money work for you.
Growth investments usually invest in small, quickly growing companies. These are referred to as “growth stocks” due to the growth potential of the company. These types of investments are generally focused on long-term growth and wealth creation.
For growth investments, you should also be able to withstand higher risks and market fluctuations.
We refer to physical real estate as a growth investment since the prices of houses and properties change often. It is highly likely for these prices to shift over time significantly. Before you invest in property, consider its value could decline, and investment property ownership can include potential losses due to maintenance and upkeep. An alternative is to invest in property through a property investment fund involved in ownership.
Defensive investments focus on generating slow and steady returns without the highs and lows of a standard growth fund. Defensive investments are suitable for people who are less tolerant of risk but content with smaller returns.
13 Best Liquid Investments Available
This section will go over some of the most common and stable liquid investments you can make this year.
1. Cash Investments
These investments include banking with regular savings accounts, term deposits, or high-interest savings accounts available at traditional banking institutions. Cash investments give the lowest returns of all investments available. Simultaneously, cash investments do not have any growth capacity but offer the most protection from market risk.
2. Fixed Interest
Of all fixed interest securities available, bonds are the most common. Bonds are sold when companies or governments need additional capital and issue bonds to borrow money from investors for a quick cash infusion. The borrowed money is usually paid back at a set interest rate.
These kinds of bonds can also be a type of defensive investment because they are relatively safe investments which result in lower returns than high volatility investments. You can also sell bonds very easily, but you may have to deal with capital losses.
Think of a share of a company (stock) as a type of growth investment that can help you boost your original investment value. This is a type of medium or long-term investment. When you have ownership of shares, you can also earn from dividends if the company offers them.
Dividends are part of the company profits, or earnings, that is paid out to the shareholders. The value of each share differs and may drop below the price you initially purchased it for. The value of a share, known as equity, can fluctuate daily due to active market trading.
Owning individual shares (individual stocks) are generally long-term investments meant to profit from their success. However, with the potential of company growth comes the potential of an industrial decline and a reduction in your investment value.
4. Online Savings Account
An online savings account is an excellent liquid investment, and it is risk-free. Consider a good high yield savings account and earn some interest on your money.
This investment is suitable for people with some idle cash that want to avoid the annual losses that come with inflation. You can simply move your money from a regular bank account, where it earns no value, and transfer it to a high yield savings account where it will make a small amount of interest – while remaining liquid.
These accounts can be opened easily and usually do not have any expense ratios or transaction costs attached to them.
5. Block Savings Account
Saving money in a regular bank account does not earn you money. However, having a cryptocurrency savings account is an option.
Through platforms like Block, you can easily deposit cash and purchase a stablecoin. The stablecoin will trade at a ratio of 1:1 with the dollar, and you can make your exchange at any time. You can also access your money anytime for this investment because the money is liquid in your cryptocurrency account.
Just like banks, companies like Blockfi also make loans for interested parties. Block loans are, however, in cryptocurrency. While relatively new, Block accounts can pay you as much as 8.6% in stablecoin annually. The stablecoin can undergo a cash conversion back into US dollars. The Block rate is more than 15 times higher than what a bank offers, which is a good investment.
You also need to know that having a cryptocurrency savings account means that your money does not always have FDIC insurance like a traditional savings account. In addition, Cryptocurrency accounts are also linked to numerous cases of digital theft.
Working with Block, however, gives you deposited funds insurance. This means that your money is more secure from issues like theft. Block is an optional liquid investment opportunity, and you can begin by investing a small amount of money.
6. Certificates of Deposit (CDs)
A Certificate of Deposit (CDs) involves depositing money for a particular period of time. The investment guarantees your return regardless of interest rate fluctuations during the length of the investment.
Consider buying a CD from a financial institution with FDIC insurance. This gives you investment insurance for as much as $250k. CDs are structured so that the longer you tie up your money in the certificate, the more interest you can earn.
7. Money Market Account
Money market accounts are a reliable investment option to consider for your liquid funds. At the moment, these accounts pay comparable Annual Percentage Yields (APY) to one-year CDs and still allow direct access to funds.
Money market account holders get ATM cards, deposit slips, and checks after opening a money market account. The money market accounts operate based on the balance in an account. They do not perform based on the amount of time you invest in your money.
The risk involved in this investment is minimal, yet you get to earn a higher return rate for your money than a traditional savings account. For these reasons, money market accounts are a common investment preference among smart investors.
Alternative Liquid Investments
The investments discussed here are more diversified than the previous ones described. However, the disadvantage with most of these alternative investments is that they are not entirely liquid. This means that the assets will be locked up for a period of time.
If the investment is in real estate, for instance, it is considered a great alternative investment. The real estate investor generally should invest for a long time for the best returns.
Currently, there are some new and unique alternative investments that utilize real estate to create wealth. These investment ideas are short-term maturities and quite convenient. They work outside the stock market, and that is why they are regarded as an alternative. They include companies like Fundrise that sell real estate investments as well as low-cost ETFs.
To invest in Fundraise, you need $500 as a minimum deposit, and you can expect 8 to 12% returns. Another example of recent alternative investments is worthy bonds. This investment entails investing in small businesses through buying their bonds. From the investment, you can up to a 5% rate of return.
8. Online Checking Accounts
Online checking accounts are like online savings accounts. This type of investment is suitable, especially if you are looking for short-term investment. The accounts give you many of the benefits you receive with an online savings account since online checking accounts offer more liquidity on investment.
Online checking accounts offer the highest liquidity level because you can withdraw your money with a click of a button. The other great feature about online checking accounts is that they offer free cash bonuses to investors.
Some of the recent promotions have included cash bonuses worth $150 from a deposit of $15k, and for a $25k deposit, a cash bonus of $200. The bonuses and low interest rates are factors that encourage people to invest in online checking accounts.
To make it convenient, online institutions provide account holders with debit cards for easy ATM withdrawals.
9. A Roth IRA
This type of investment is funded with after-tax income, and your money grows tax-free. This means the interest you make from your investment in a Roth IRA can be withdrawn at a later time without paying income tax! Roth IRA’s are one of the best investments available due to the tax benefits.
In addition, if you leave your money in a Roth IRA for five years, you can withdraw portions of the money you have deposited into the account at any time. However, there are certain restrictions on withdrawals from a Roth IRA.
If you withdraw any of the interest gained from your investment before the age of 59 1/2, you will pay income tax on the money and an additional 10% withdrawal penalty. There are a few qualified exemptions for early withdrawals that will not be discussed here.
Funds in a Roth IRA can be invested in mutual funds, bonds, ETFs, and more which will provide various returns on your investment.
10. Corporate Bond Funds
Compared to money markets, bonds are not as stable. Due to volatility, bonds usually offer investors a higher return on investment. Bonds are a market product, and earnings are, therefore, based on the existing market condition in changing monthly payments.
Short-term bonds usually take two years or less to mature, which is a motivation for many investors. The short time of maturity is a factor to consider before investing in bonds. You can buy bonds from many online brokerages like Robinhood and Webull.
11. Pay-off High-Interest Debt
This is a great investment in yourself that enables you to earn fantastic investment returns. If you own a credit card with an interest rate of 15% and a balance of $10,000, you pay extremely high fees each month. Paying off this debt is similar to getting a return of 15% on a $10,000 balance.
Paying off high-interest debt not only makes excellent financial sense, but it also helps you to save money. You save from future investment costs, and your financial situation is likely to improve. This investment is a complete win, giving you returns and saving you money.
Many people in the United States live paycheck to paycheck and use credit cards to pay for their basic needs. Credit card debt is extremely detrimental to financial stability and should be paid off as soon as possible.
12. Treasury Inflation-Protected Securities (TIPS) – 5-Year Investment
Commonly referred to as TIPS, these are inflation-indexed government bonds. The TIPS interest rates are tied directly to the consumer price index and current market conditions. TIPS are offered in 5, 10, and 30-year investments.
For example, suppose an investor owns $100 in TIPS with a coupon rate of 1%. After the first year, if there were no inflation, the investor would make $1. If inflation rises by 3% the next year, the coupon rate will increase by 3% for a total of 4%. However, if deflation would occur, the interest rate would decrease by the deflation percentage rate.
Since TIPS’ interest is taxable, many investors prefer going into a mutual fund and TIPS ETF. Mutual funds and ETF shares are bought through brokerage accounts.
13. Municipal Bonds
Compared to TIPS and other government treasury investments, municipal bonds are a bit riskier. However, most municipalities do not default bonds. The most significant risk with municipal bonds is that of interest rates.
Government bond funds usually have lower interest rates than short-term corporate bond funds,, and in such an environment, the bond’s value lowers to compensate the rates when they arise in the marketplace.
Unless the municipality defaults, holding the bond to maturity enables you to gain 100% back on your original investment as well as the interest your investment earns.
Wrapping It Up
If you have some money that you want to sock away, what better way is there than to have it earn you more money? That is the fundamental reasoning behind liquid investments. There are various short-term and less risky investments you can venture into and secure your money while earning more.
The main factor to always consider is that the investment should be easy to liquidate and have immediate access to cash for a financial emergency.