Returns vs liquidity–what to choose and how to balance both?

Aug 16, 2022

Returns vs liquidity–what to choose and how to balance both?

In this blog, we shall discuss whether one should opt for high returns or liquidity. We shall begin with factors that are the most important to consider while choosing an investment avenue and then discuss why going with liquidity as an option is great. At the end of the blog, we shall take a look at why FMPP is the best move to make in healthy investment practices.

Returns or liquidity, what should be the priority?

Investing is fraught with numerous difficulties. One has to find the right investment avenue; in other words, asset classes are gradable. Investing methodically or reaching a mean in saving and spending is another obstacle to overcome. Besides, opting for a short-, medium-, or long-term investment is another mean to reach. 

Since investing is not a priority for most people, opting for an investment avenue that offers liquidity is also an oft-considered option. However, as a rule of thumb, liquidity should not be considered; after all, it comes with its own trade-offs. Such options are either short-term ones or offer very low interest rates, so much so that they don’t prove effective against inflation. 

Opting for high returns is the final goal for any investment. Hence, choosing a high returns-yielding investment avenue is a great investment strategy. 

Returns and liquidity, a scale to slide

As stated above, high returns and liquidity are two ends of a line. Although there is a point of intersection between them, it is still up to an investor as to where to find it. Fixed-term, fixed-maturity investment avenues, namely fixed deposits, recurring deposits, SIPs, etc offer returns with fixed rates of interest. Non-fixed-term, non-fixed-maturity investment avenues, namely intraday BSE and NSE investments, etc offer returns with high liquidity; however, they do not offer any stability; even the principal amount is not protected. Investments in tangible assets like physical gold, gold ETF, real estate, etc give someone the flexibility to liquidate; however, the returns one can get are subject to the market conditions. 

General practice in optimum financial management and the 50 30 20 rule

Healthy financial practices like savings and investments help someone overcome many financial burdens. The 50:30:20 rule is followed and recommended by many. 50% of the earnings to be spent for needs, 30% to be spent for wants, and 20% to be saved or invested make a healthy financial practice. Spending can help in taking care of short-term needs, while savings and investments can be aimed at the long term.

Investing can be multifaceted. One can aim for a short, medium, or long term or a mix and match of both. Besides, portfolio diversification can be used for earning optimum returns with differently timed maturities. 

Asset classes worth considering for investment

Given the plethora of asset classes the market is filled with, choosing the right one can be daunting. Even after taking budget management into consideration, one may be left with numerous options to zero in. Different investment avenues come with different lengths of commitment; they all vary in terms of returns too. 

Fixed-term investment avenues, for example, are great for medium and long terms. They also come with more ty of returns within the agreed-upon proposition. Fixed deposits and recurring deposits can give returns along with principal protection. FMPP, i.e. Fixed-Maturity Peer-to-Peer Plan from LenDenClub, offers inflation-beating, double-digit returns, i.e. up to 10 to 12% p.a.*

P2P lending in general can offer good returns since it works on a mediator-reduced business model. However, there can be some volatility with some plans since, after all, P2P investments are subject to repayments from individual borrowers. With FMPP, LenDenClub adds a dimension of security to the investment amount as well as the returns. 

FDs and RDs vs FMPP in terms of liquidity

FMPP is regarded as a revolutionary investment avenue since it brings about unprecedented features in one place. One can earn returns that are higher than many traditional fixed-income asset classes, while being non-market-linked.

FDs and RDs do offer liquidity; however, there are some charges for premature withdrawal. In some cases, the charges can be high, so much so that they negate the earned returns. FMPP does not offer liquidity even if an investor agrees to pay charges. This, coupled with the starting investment amount of ₹10,000 and the flexibility to have multiple FMPP investment plans varying across maturity periods, means FMPP has been designed as a committed-term plan for serious investment. 

Conclusion

Returns and liquidity are the two different ends of an investment. Liquidity is not a good factor worth considering for an investment. Even though some asset classes do offer liquidity, they have unfavourable returns propositions. FMPP, being the strongest contender in fixed-term, fixed-maturity investment avenues and as a worthwhile new-age investment avenue, gives some of the best features of all asset classes.

*P2P investment is subject to risks. And investment decisions taken by a lender on the basis of this information are at the discretion of the lender, and LenDenClub does not guarantee that the loan amount will be recovered from the borrower.

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