One of the key considerations in any investment decisions is easy liquidity. What we all understand by liquidity is that the asset can be easily converted into cash and can be monetized very easily. That is the intuitive definition and it is also largely appropriate. It is just that we need to fine tune the decision a lot better. Let us look at how to define liquidity. There are broadly 4 pre-conditions to liquidity when you invest:

Is the asset convertible into cash without too much time and effort?

Does the asset carry any default risk?

Will the asset lose value if liquidity is required at short notice?

Can liquidity be leveraged through alternate means?

On can better appreciate the nuances of liquidity with this live example! Rasik Shah has an investable surplus of Rs.200,000 which he needs to invest in an asset for a period of 1 year. At the end of 1 year, Rasik Shah needs this money to pay the down payment of the apartment he has just booked in Virar. Therefore the most important consideration for Rasik Shah is that it should be liquid. That means it should be convertible into cash at short notice. Secondly, Rasik Shah also needs to ensure that this asset does not lose value. If he invested Rs.200,000 in equities and the value of the shares has fallen to Rs.150,000 due to a global downturn, then he has a huge liquidity problem on hand in bridging the gap of Rs.50,000 for his down payment. When you are clear that liquidity is your prime consideration, as in the case of Rasik Shah, then the four key tests must be applied.