Wealth is not liquidity

I remember my grandmother’s story of how she sold her bangles when the family went through a financial crisis. She was not the only one – many families have similar stories of how the family gold was sold during a crisis. In the middle-class dominant, pre-liberalisation India, families only had cash, gold and land as assets. Today, investments are rarely limited to gold or real estate – mutual funds, stock, crypto, the list goes on.

Also, I am just realising as I write that I have heard “cashing out my mutual fund” more often than “sold my gold”. I wonder when this shift happened? Even today, the stories are the same, only the assets have changed. Of course, I am not referring to people who are forced to sell off all their assets due to a financial tragedy – bankruptcy and liquidation are not what we will be discussing in this article. Here, I am merely introspecting on the people going through a temporary financial challenge.

A pattern that I have noticed in the recent past is that people are busy building wealth but are forgetting to factor in liquidity. A temporary financial emergency can force a prudent optimised investor to sell at a loss. Simply put, the benefits compounded over time are lost to premature exit. A sudden loss of job, a medical emergency – unplanned life events can tighten the cash available to them, triggering such distress sales. Distress sales may seem like an unfamiliar term that exists only in finance case studies and not something that is part of our lives. We may not call it a “distress sale” but we have experienced this phenomenon or witnessed it happen to someone close.

The Distress Sale Trap

Today, mutual funds and SIPs are popular and many of us commit a portion of our income to them. The bigger question here is: do you know the finer details of the fund in which you are investing? I remember this anecdote I read on social media during the covid lockdown days. A technical professional, laid off during covid, was running short of funds and decided to encash his mutual fund units – only to discover that the fund carried a three year lock-in period. He had invested in ELSS (Equity Linked Savings Scheme). Sometimes, cocooned in the safety of our jobs, we rarely read the fine print of our financial decisions.

Not just the fine print on investment instruments, many of us are unaware of laws governing default in payment of housing EMIs. A post on social media went viral a couple of months back on a man losing his flat worth Rs 1.2 crores due to non-payment of 3 EMIs. The bank auctioned his property, under the SARFAESI Act, for Rs 95 lakhs within 60 days of issuing notice, leaving him with a mere Rs 15 lakhs after 8 years of loan repayment. While a section of social media debates the veracity of the numbers, I believe the core message is that possession does not automatically mean ownership. An asset worth Rs 1.2 crores on paper which, on liquidation, results in a mere Rs 15 lakhs – the difference between wealth and liquidity under distress.

Economic downturns and layoffs go hand in hand. Take the specific instance of 23 March 2020: Sensex fell 3,934 points (around 13%) during the Covid lockdown. Consider the impact of this market fall on an investor holding say 1000 units of a fund which has a market value of Rs 100 per unit. After the market falls, the value per unit becomes Rs 70 and the portfolio value falls to Rs 70,000 from the earlier Rs 100,000. If the investor, who has just lost his job, makes a distress sale when the market is down, he is forced to sell at a loss.

What, then, can one do, to prevent such distress sales? The answer lies in creating an adequate emergency fund because it is better to be prudent and plan for a crisis that may never happen rather than be caught unaware.

No Magic Formula to Emergency Fund Planning

I have seen social posts that state “Keep aside 12 months of expenses as emergency fund”. They are not wrong but neither are they right. The amount to be kept aside depends on the person in question. A person who is the sole breadwinner of the family needs to keep a higher amount aside compared to a person whose spouse is working and whose retired parents also earn passive income. The emergency amount for a person who depends entirely on salary for their sustenance is different from someone who also earns a significant amount as rental income from properties. A loss of job does not mean the same thing to each of them.

The first step is, therefore, to sit down and evaluate the sources of your money and plan how you would meet your fixed obligations if you lose your primary source of income. The answers to these questions are uniquely yours and therefore, a standard template for financial planning is a risky choice: an inadequate emergency fund will lead to distress sales and an excessive fund means you are losing out on higher returns.

The next step is to understand how easy or difficult it will be for you to withdraw your money from this plan. Investment plans today resemble a modern “Chakravyuha”- entry is easy while exit is tough. Investments can be bought in the click of a button, but the proceeds from sale of these investments take at least T+1 day to land in your account. If you have failed to update your KYC, then it takes at least a week for you to get your funds.

An investment that fluctuates with the market, even if capable of being liquidated quickly, may not be the best option for an emergency fund. Parking your emergency funds in a savings account may seem counter intuitive, but it keeps your fund safe from market fluctuations.

Gauging the Economic Climate

It is worth checking if the cases that went viral were just capturing the fancy of social media or if it is the tip of the iceberg, indicating an underlying larger pattern. RBI data can establish if household debt and savings are going through a change. And how unstable is the macro environment?

RBI’s June 2026 Financial Stability Report states that household debt has increased from 36.6% of the GDP in June 2021 to 45.5% of the GDP by September 2025 – indicating the household debt is growing faster compared to the economy. This shift indicates that more and more households are adopting a “buy now, repay over time” mindset.

The RBI’s Handbook of Statistics on the Indian Economy, 2024–25 states that household savings have dropped from 11.8% of GDP in 2020–21 to just about 5.3% of GDP by 2023–24. While inflation has forced households to spend more on essentials, it is not the sole reason for a fall in savings. RBI data shows that savings are being redirected towards higher spending on lifestyle consumables, repayment of debt and investment in market-linked instruments. So, households are buying more, borrowing more and saving less – all on the assumption of an uninterrupted steady income.

Chief Economic Advisor V. Anantha Nageswaran recently warned that AI would replace basic jobs like coding and program writing, making some IT skills redundant. He believes that the extent of this disruption may not be visible until 2030. People will have to focus on developing new skills to stay relevant in the new job market. While AI has the potential to disrupt cognitive as well as skill-based jobs, he believes that care economy, trade skills in labour intensive markets and sectors like ecological engineering will be the new growth areas.

I believe that the CEA’s advice to upskill is crucial for employees. As AI gradually cements its place in the job market, the question Indian IT engineers need to ask is “Is my role AI-proof or will it become a casualty to AI?” And more importantly, “Are my financial decisions structured around a steady uninterrupted salary income?”

Are you financially resilient?

For many of us, wealth planning is an end-of-year checklist activity. Some investments we make for tax purposes, some others for earning a targeted return on our portfolio and a few others under pressure from a friend or family.

While we focus on building wealth, we rarely understand the repercussions of quitting an investment plan mid-way. We may be wealthy, but can we meet emergency expenses without breaking our long-term assets? Can our market-linked investments be sold at a day’s notice? And, if we lose our job tomorrow, how long can we survive without dipping into our SIP?