Liquid Assets meaning relates to those Assets that may be easier to convert into cash or sell without any loss in its value. It helps an individual or an organisation to Liquid funds at any point in time.
Liquid Assets Formula
The consolidated Liquid Assets are cash and such securities that can be readily subjected to cash conversion without the current liabilities. The formula is mentioned below.
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(Marketable Securities+cash)-Current Liabilities=Liquid Assets |
Liquid Assets Examples
The examples of a Liquid Asset would comprise both cash and investments.
Legal tender by way of cash is easily accessible and highly disposable. It can be utilised immediately for paying any existing liabilities. Cash available, whether at a Bank or in hand, is considered to be Liquid as it may be immediately used without any associated formalities.
Specific investments can also be considered as Liquid as they can be Liquidated readily. In case of any financial urgency, it may be converted to cash quickly. Investments comprise a large number of instruments such as mutual funds, bonds, money market instruments and stocks, among others.
List of Liquid Assets
Among a host of Liquid Assets, few have been mentioned below.
Cash at a Bank pertains to the sum of the amount that is deposited in a financial institution. It is considered to be a current Asset in a highly Liquid form.
It usually refers to the total accessible cash of an organisation. In the context of a company, cash in hand helps in the inference of the number of days for which an organisation can carry on with paying its operating expenses with the available cash.
The short-term investment securities are known as cash equivalents with maturity periods to be usually around 90 days or less. Examples of cash equivalent include Treasury bills, legal tender, cheques that are received but not deposited etc.
A government may issue debt security to raise funds. The holder of a government bond earns a fixed amount of interest against the amount loaned to a governmental body.
A promissory note is a financial instrument that shows the written promise by an issuer to pay a definite sum of money to a payee on a determined future date. It creates a legal obligation on the issuer to pay such loan.
Accrued income is such an amount of money that has already been earned but yet not received. Interest earned on investment that has not been received is an example of accrued income.
It is an investment in company shares representing ownership corresponding to the volume of stocks owned. Through an increase in the value of stocks, investors can earn capital gains by selling such shares.
Account receivables pertain to such proceeds or payment that the customers of a company will have to pay for purchasing services or goods on credit.
Importance of Liquid Assets
The importance of Liquid Assets for companies arise from the fact that Liquidity happens to be a key component of financial health, based on which investment decisions are undertaken. It becomes crucial in the instances of emergency debt payment, and payment of taxes or wages etc.
Liquidity Ratio
The analysis of Liquidity is done by a number of ratios. Liquidity ratio is significant as it indicates whether a business holds the capacity to pay off its short-term debts. The two significant Liquidity ratios are –
This ratio measures the ability of a company to settle its short-term obligations within a particular financial year.
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(Marketable Securities + Cash) – Current Liabilities = Liquid Assets |
It is the extent to which a company may settle its short-term financial liabilities without securing additional financing or selling off its inventory. It is also known as the acid-test ratio.
Test Your Knowledge –
1. Which of the following do you think is the most Liquid Asset?
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Government securities
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Cash
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Land
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Stocks
2. Which of these below-mentioned options can be considered as a Liquid Asset?
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Cash in hand
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Stocks
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Marketable securities
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All of the above
3. Investments can never be considered to be Liquid?
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True
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False
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At times
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Only when sanctioned by the government
Solutions
(b) Cash
(d) All of the above
(b) False
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Some Disadvantages of Liquid Assets
No Guarantee Liquid Finances are also linked to the request. Hence, they witness constant oscillations. There’s no guarantee of safety of stars in a Liquid fund.
For illustration Suppose you invested Rs 5 lakhs in a Bank FD. On maturity the Bank guarantees to repay you Rs 5 Lakhs. So, you don’t lose your invested capital.
This guarantee isn’t available in Liquid Finances. Since Liquid Finances are pronounced linked, there’s a chance of the capital getting eroded. But since Liquid collective Finances invest in AAA rated papers, they’re veritably safe.
But since Liquid collective Finances invest in AAA rated papers, they’re veritably safe.
Taxation Short term capital earnings in Liquid collective Finances are added to your income and tested as per your duty arbor. So, investors falling in the loftiest duty type end up paying advanced short term capital earnings duty.
Operation Freights When you invest in Bank deposits, you don’t have any pay any fund operation freights. This is because the Bank only holds your plutocrat. It doesn’t manage your plutocrat. But in a Liquid fund, your fund director manages your portfolio and charges a fund operation freights.
Compared to 2-2.5 expenditure rate of equity Finances, the expenditure rate of Liquid Finances is veritably low. For illustration The expenditure rate for TATA Liquid Fund – Regular – Growth is only 0.33.
As you can see, the advantages of Liquid Finances far overweigh the disadvantages. Hence Liquid Finances are the perfect investment option for retail investors.
Investors looking to deem fat short- term cash or perk can consider investing in Liquid Finances.
But just because Liquid Finances carry lower threat, doesn’t mean that all Liquid Finances are great for investment.
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