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How much cash do you need?

November 20, 2003 11:22 IST

Ask the question "How much cash do you need?" and the most likely answer you'll get is "As much as I can lay my hands on". On a more serious note, what we are looking at is the liquid funds deposited in savings bank accounts and stored in cupboards and bank lockers. Out of the total income received, it's a common practice to set aside cash for emergencies, day to day expenses and the balance is stored in the savings bank accounts.

Investing is an activity most of us indulge in once in a while; the most common method involves "tracking" the pass-book, waiting for a big sum to accumulate and investing in a fixed deposit. Till that time your hard-earned money continues to languish in the savings account earning a paltry rate of 3.5%.

Emergencies do crop up and as a prudent person it makes sense to save something for the rainy day. The moot question is what portion of your total earnings do you need to maintain in cash and how much do you actually maintain. Let's assume Mr. X earns Rs 18,000 per month, after paying all his bills ranging from rent, grocery to home loan EMI he manages to save Rs 4,000 which is dutifully deposited in his savings account. Does Mr. X need this entire amount at his disposal Not really!

Even for a person who is extremely conservative, putting aside 25% of this amount (Rs 1,000) should not be a difficult task. This amount can be invested in short term plans offered by mutual fund schemes. Short term plans invest in debt securities and money market instruments and are designed to suit investors with a shorter investment horizon. Also the investment is fairly liquid in nature since redemption is possible in 2-3 days. Investors can enter short term plans with amounts as small as Rs 500. Leading short term plan have offered returns in the range of 7.6% to 12.6% in the past 12 months. Even if these returns seem exaggerated (considering the rate cuts in the recent past); going forward one can safely presume that they will continue to outperform returns offered by bank accounts.

Short Term PlansNAV (Rs)1-Mth6-Mth1-YrIncep.
SUN F&C MONEY G 18.261.5%5.4%12.6%13.0%
PRUICICI STP G 11.730.9%3.7%7.6%8.3%
RELIANCE STP G 10.650.9%4.1%NA6.4%
GRINDLAYS SP SAV STP G 12.540.8%3.6%7.6%8.3%
FIRST INDIA INCOME STP G 10.920.8%4.2%8.2%8.3%

(NAVs as on October 14, 2003)

Now the flipside of short term plans, there is an element of risk since there are no guaranteed returns. But the returns compensate investors for the risk borne. Prudent investors make their gains by investing at regular intervals rather than investing a lumpsum figure. These investments instill a sense of discipline which is essential for achieving financial goals.

Similarly storing money in bank lockers at best provides a sense of security, but at a cost. The same amount could have been invested to earn a little more money, without compromising on liquidity.

The bottom line is that lazy money does not serve any purpose. Go ahead and get invested, it's the smart thing to do!

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