How to Optimally Manage Cash in Times of COVID-19

May 23, 2020

COVID-19 pandemic has led to extensions in lockdown as no signs of containment or a vaccine discovered yet, despite many lab tests happening globally. The lockdown has augmented plenty of job loss and salary cuts, ensuing people to preserve wealth and have a sense of urgency about cash. People have been dipping into their savings pools, redeeming their investments, be it a mutual fund or term deposit, for liquidity reasons.

[Read:  Coronavirus Has No Antidote. Your Bad Investments Could Have.]

My neighbour Sushma, a college professor, spoke with me last Sunday, seeking financial advice, "What should I do now? Since the past two months haven't received my salary and living off my savings, which is running out. "

Her words gave me a moment of reflection; it is not just Sushma, most of us are sailing in the same boat. Some even have to pay their house rents as well to have a roof over their heads.

"Current times spell desperate times and it calls for desperate measures. Only cash comes handy in such a situation. Hence having cash is extremely important for day-to-day expenses to buy inflated essential goods.

Cash is the only asset class that will provide you with a return of principal in the short run. It is equally important to have some portion to hold in cash like your savings for retirement, a new house, or children's future (education and expenses) as well. "

Sushma agreed and asked, "Why else is cash important besides meeting your daily living expenditures? "

Here are the reasons I gave her...

  1. Having cash-in-hand provides easy liquidity. The advantage is that you can spend it whenever and on whatever you need and want. Despite the digitised payment systems, cash serves as the mode of currency exchange at various small retail stores, groceries, and for small purchase items.

  2. It comes in handy to make down payments of some large items or to meet near-term planned and for foreseen expenses when you need instant cash.

  3. Emergencies or unforeseen events like accidents, wedding invitation from relatives, loss of job, hospitalization, unexpected rise in your child's school fees, etc., can happen at any time and leave you high and dry. So, prepare yourself financially so you have a sense of security and strength to overcome those testing times.

    [Read:  Have You Built A Rainy Day Fund Wisely?]

  4. Besides, when you are almost nearing your goal, your motive is to protect your capital, that time you can transfer it to cash or near-cash investment avenue for instant liquidation.

  5. It acts as a buffer or provides investment opportunities during market crashes. If you have cash, you can own an investment product at a reasonable price when it's available. Else, you would either be forced to sell shares or other investments, perhaps at a time when the market is down, or let go of the investment opportunity altogether.

Image source: Image by Kevin Schneider from Pixabay

"So how much cash should one hold on to? ", Sushma asked.

Ideally, a reserve of 10% to 16% of your investments should be in cash reserves that should last upto 6 to 12 months. Till the time lockdown eases and everything gets back to normal gradually, the cash holding will be a buffer to provide pooled income for day-to-day expenses, pay rents, utility bills, insurance premiums, loan EMIs, etc.

"So, which avenues provide easy access to cash? "

As mentioned earlier, since it has to be a part of your investment portfolio, the investment should be for short term (less than 2 years) and shifted to relatively safer avenues.

Here are a few avenues to park your money that will provide you with easy access to cash

  • Savings Bank Account and Term Deposits

    Well, this is an age-old and easiest way to park short-term needs, and even keep aside some money to manage contingencies. You'll earn around 4%-6% p.a. interest, depending on the bank you opt to park your savings.

    But if you wish to battle inflation (which erodes the purchasing power of your hard-earned money) while managing your short-term liquidity, you may consider recurring deposits (RD), Fixed Deposit, a Sweep-in Account, or a Flexi/Recurring Deposit. The interest rates will be a few percentage points higher than the savings interest you earn.

    [Read: Should You Be Going Back to Traditional Investments Now?]

  • Liquid funds

    Liquid funds are open-ended debt mutual funds that primarily invest in short-term money market instruments with maturity up to 90 days. Liquid funds invest in money market instruments such as Certificate of Deposits (CDs), Commercial Papers, Term Deposits, Call Money, Treasury Bills, and so on. Liquid Funds due to high liquidity are better than bank FDs as they carry the potential to generate inflation-adjusted returns, also known as the real rate of return.

    However, a lot depends on selecting the best funds because they carry high risk; given the market-linked nature of liquid funds, return potential hinges on market conditions, and how efficiently the fund manager manages the portfolio. So, consider liquid funds only if you are open to taking credit risk to a certain extent. Otherwise, overnight funds can be an alternative.

    [Read:  Looking for the Best Liquid Funds of 2020 to Address Your Liquidity Needs]

  • Overnight funds

    It has the shortest investment duration of one day and provides better returns than bank FDs and have higher liquidity. The interest rate risk involved herein is near zero. However, there can be a reinvestment risk, i.e. overnight funds may not be able to reinvest their proceeds at the same rate of return, but at least that doesn't cause any capital erosion.

    [Read: Lessons Learnt from the Debt Fund Crisis]

Besides these avenues, we should rejig our monthly budgets, be a little frugal, spend wisely so that we don't run out of cash till everything goes back to normalcy and save whatever you can as well to invest for the future.

We should even consider realigning our several financial goals, so that we can make redemptions from the investments and reinvest or rollover into an alternative avenue that will act as a steady source of income.

For example, for the next eight months we might not want to plan for any vacation or holiday abroad. So, if one was investing for this financial goal, you could definitely redeem this investment and use the money during a cash crunch situation. You could even reinvest it in any of the avenues listed above, which will not only solve the short-term liquidity crisis, but will help you save for the future.

Similarly, review the portfolio if you find any scheme that's been underperforming consistently, you can redeem money from there too.

Sushma concluded, "Every penny saved is a penny earned" before bidding good bye.

Conclusion: 

Sushma's situation is an case in point for the lives disrupted by this pandemic and who are not eligible for aid by the 'Atmanirbhar' agenda of government's relief package and have to, literally, fend for themselves. Cash-in-hand is king now, so maintain some cash holdings.

PS:  If you wish to select worthy mutual fund schemes, I recommend you to subscribe to PersonalFN's unbiased premium research service, FundSelect.

Additionally, as a bonus, you get access to PersonalFN's popular debt mutual fund service, DebtSelect.

If you are serious about investing in a rewarding mutual fund scheme, Subscribe now!

 

Warm Regards,
Aditi Murkute
Senior Writer

 

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  • It will be good if all your services have download in PDF format the way we have for fundselect.

    sonalnk@yahoo.com | May 23, 2020
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