The LRR of Investments

When we talk about investments, there are three Pillars i.e.: Return, Risk, Liquidity

We can call them the tripod of investing. Let’s understand the importance of these factors:

Return – means how much your money can grow.

Risk – is the probability of losing money or not meeting expectations.

Liquidity – means how easily can I convert my investment into usable cash without suffering a significant loss in value?

While deciding about the investments, most of us are focused to return and risk but leave liquidity without bothering about it. That is not a smart decision, liquidity also deserves same importance along with return and risk.

Let us understand the importance of liquidity in the practical world:

Consider investment in real estate, one of the favourite asset class. It feels tangible and prestigious. But if one needs money due to some emergency,  can we sell it quickly ? The answer is usually no or not without accepting a lower price than the market rates.

Another example:  A ten-year single premium insurance policy. It looks safe, comes with a promise, and may even offer tax breaks. But ask yourself — what happens if you need the money in the fourth year? Will you get it back without penalties, delays, or a haircut in value?

 

So, why is liquidity so important in investment decisions?

In situations like job uncertainty or the untimely death of the main breadwinner, liquidity of the investments becomes a survival factor.  For example:

1.    In the absence of the main breadwinner of the family, the family needs to pay for the Immediate expenses like school fees, medical bills, groceries, utilities, EMIs etc., and only liquid assets can cover these on an immediate basis.

2.    At a job loss situation or reduced income flow, liquid savings act as a buffer until a new source of income is established.

3.    Having liquid assets helps in avoiding distress sale: Illiquid assets like real estate or long lock-in products like Endowment Policies may fetch poor prices if sold urgently. Liquidity prevents this.

4.      Liquid Assets gives us flexibility in case of an emergency. It gives freedom to make critical decisions—like relocation, re-skilling, or paying off high-interest debt—without financial stress.

5.      Liquid Assets also provides Psychological Safety. If we know that funds are readily accessible, it gives us immense peace of mind during a crisis.  

 

Hence, a good financial plan should balance protection (insurance), growth (investments), and liquidity (emergency funds). Without liquidity, even the best assets can become a burden in times of uncertainty.

So next time, before committing money to any investment, ask:

       i)          What is the lock-in period?

      ii)          If I exit early, what will it cost me?

    iii)          Am I being rewarded adequately for giving up liquidity?

    iv)          Does this investment align with my future cash flow needs?

Let’s remember that investments are not just about growing wealth. They should serve our life goals — both planned as well as unplanned (emergencies).

So, next time before considering an “attractive” investment product, don’t look at just returns and safety.  Find out whether this investment will be there for me when I need it most.