Balancing act - How much liquid cash to have in hand is an aspect of portfolio management an investor needs to master

If the initial public offers (IPOs) in the market tempt you, and the new fund offers (NFOs) arouse your interest, then there is quite a possibility that you are frantically going through your savings account, little realizing that this could eventually lead to a situation where you are neck-deep into investments with little or no cash at hand.

With the market scaling new heights almost every passing day, there are a number of investors who are looking for immediate returns from the bourses. They often forget that investment is only one part of managing personal wealth.

Financial planners recommend that greater emphasis should be on how to make existing investments work. And it’s important that you should have enough liquidity in your portfolio, if any need arises. So, if you’ve been wondering how to stay in the bull run and still have enough cash at hand, here is an insight on the balancing act for a comprehensive portfolio.

Analysts believe that with rise in consumerism and parallel growth in retail banking and consumer finance, the need for cash at hand or contingency fund has vastly diminished. Credit cards have emerged as the most convenient way of funding short-term spending needs without panic liquidation of portfolio. Overdraft facilities and personal loans against assets, property or securities are generally easy to raise, are quick and require minimal paperwork. In other words, keeping liquid cash sloshing around in your current or savings bank account is not the recommended option.

However, this doesn’t mean that you totally discard the option of having any cash-in-hand. “The amount of cash to be kept depends on several factors, though one thumb rules says that at least ‘three months expenses’ should be kept in your bank balance,” says Manoj Vaish, president & CEO, Dun & Bradstreet India. He cautions that in no case financing from credit card should be used, as the charge could be as high as 24 to 36% per annum.

Cash-in-hand may be advisable if you have recently booked profits. “The market is too volatile to make fresh investments and a correction is imminent. Cash-in-hand is also necessary if you have taken forward buying or selling positions, just in case the market does not move as predicted,” he affirms.

Analysts feel that for a salaried person who has a regular and predictable source of income, the cash balance should be just enough to meet one-two months of household expenses. This, of course, has to be backed up by a few credit cards, fixed deposits of 6-12 months maturity (preferably in multiple units so that, if the need arises, you need not break the whole fixed deposit) and other liquid investments such as open-ended mutual funds. This is, in case, you need funds urgently for personal reasons or also to capitulate on any fresh investment option.

Though how much cash one should keep depends on an investor profile, Vaish insists and adds that the guiding principles remain the same. You should take into account — any upcoming expenditure (travel & holidays, school fees, tax payment), steadiness of income (stable like salary or variable as in business), how quickly other investments can be converted into cash (financial assets are much easier than real assets), medical insurance cover and the ability to quickly arrange a personal loan to meet any unforeseen contingency.

Investment in shares is desirable though the extent to which it should be in your portfolio depends on the age and risk profile. It is almost impossible to time the market. Steady investment spread over a period of time such as through Systematic Investment Plans (SIP) and with a long term investment horizon (5 to 15 years) is best suited for this purpose.

With so many options available, cash as a portion of your portfolio may not be as necessary in today’s times, as it was earlier. However, it’s pertinent that for a balanced portfolio, you need to re-work your maths before investing in the spur.