How to Balance Investment Mix in Liquid and Illiquid Assets Wisely

When it comes to investing, one of the most overlooked yet critical decisions is how to split your money between assets you can quickly access and those that build long-term wealth. Striking the right balance between Investment mix in liquid and illiquid assets isn’t just about strategy; it’s about aligning your financial choices with your lifestyle, goals, and risk appetite.

Should you keep more cash or invest in assets that may take time to sell? This guide breaks down the key factors to help you find your ideal mix and make smarter, more secure financial decisions.

Let us have a glance at what Liquid and Illiquid assets are.

Let us have a glance at what Liquid and Illiquid assets are

Liquid assets

Liquid assets can be easily and quickly converted into cash without losing much value. They are essential because they help you meet short-term needs, emergencies, or opportunities without selling long-term investments or borrowing money.

Key Characteristics of Liquid Assets:

• Easily accessible – You can get the money quickly (often within a few days).
• Minimal loss of value – You don’t lose money when converting it to cash.
• Low or no penalty – Withdrawing or selling has no major fees or restrictions.

Why Liquid Assets Matter in Personal Finance:

• Emergency readiness – Acts as a financial cushion during situations like job loss, health emergencies, or sudden repair needs.
• Financial flexibility – Lets you take advantage of opportunities (like investments or travel deals).
• Avoid debt – You won’t need to borrow or use high-interest credit cards for urgent needs.
• Peace of mind – Knowing you have funds readily available reduces financial stress.

Illiquid assets

Illiquid assets are those that take time to sell and often lose value if you try to convert them into cash quickly. These assets are usually harder to sell, may take weeks or months to find a buyer, and often involve legal or transactional processes.

Key Characteristics of Illiquid Assets:

• They are not easily accessible, so selling them takes time and effort.
• Value may fluctuate or be hard to determine – Market prices aren’t always readily available.
• Higher transaction costs – Selling may involve fees, paperwork, or legal formalities.

Why Illiquid Assets Matter in Personal Finance:

• Good for long-term growth – These assets can build wealth over time (e.g., property appreciation).
• Poor for emergencies – Can’t rely on them for quick cash needs.
• Diversification – They add variety to your asset portfolio, balancing liquid investments.
• Can be risky – Unfavourable market conditions might slow down the sale or reduce the asset’s value.

SEBI outlines the importance of liquid assets in covering various financial requirements, such as mark-to-market losses and value-at-risk margins. It also details acceptable forms of liquid assets and their applicable haircuts. Access the full document here: Click here.

Key Drivers Behind Your Investment Mix Decisions

Let’s take a closer look at the personal and financial factors that should guide your liquid-illiquid investment split.

1. Comfort with Risk (Risk Tolerance)

Think about how you handle stress, both emotionally and financially, when it comes to money. If you’re comfortable with market ups and downs and don’t mind keeping your money locked in for a while, then your investment mix can include less liquid assets that offer higher returns.

2. Purpose of Investment (Goal Clarity)

Every investment you make should have a clear purpose. Ask yourself—are you trying to build a retirement fund, or are you saving up for a house in the next couple of years? Your investment mix should align with your goals.

But if you’re looking at long-term wealth, like growing your money over decades, then investing in things like property or business equity, even though they’re not easy to cash out quickly, can be a smart move.

3. Time Available to Invest (Investment Horizon)

If you know you won’t need your money anytime soon, that gives you a lot more flexibility in your investment mix. With a longer investment horizon, you can confidently allocate more to illiquid assets, like real estate or business equity, because you’re not depending on that cash in the short term. Over time, these kinds of investments have the potential to grow and recover from market ups and downs.

But if you’re planning to use the money in the short term, it’s better to keep it in more liquid options. That way, you won’t find yourself in a position where you have to sell something in a hurry and possibly take a loss. It’s all about aligning your investments with when you’ll need the funds.

4. Your Financial Position (Cash Flow & Obligations)

Look, if you’re dealing with things like high monthly expenses, an unpredictable income, or you don’t have much money set aside for emergencies, it’s smarter to keep your money in liquid options—stuff you can access quickly if needed.

But if your income’s steady, your debts are under control, and you’ve got a solid emergency fund, then you’ve got room to take a few more chances. Your investment mix can now include more illiquid assets—those that aren’t easy to cash out quickly but may offer better returns over time. It all comes down to how stable your current financial situation is.

5. Need for Quick Cash (Liquidity Requirements)

You know, how much liquidity you need depends on your situation. If you’re freelancing or running your own business, it’s a good idea to keep more cash on hand as part of your investment mix to handle the ups and downs in income. But if you’ve got a steady salary coming in every month, you probably don’t need to worry as much and can afford to invest a bit more in less liquid assets after considering emergency corpus.

Modern Guidelines for Smart Investment Mix

While there’s no one-size-fits-all approach, here are some commonly used allocation models:

Regardless of your risk profile, ensure you have 6–12 months of living expenses set aside in liquid form for emergencies before locking funds into long-term illiquid investments.

To Conclude

If you ask me at what ratio of liquid and illiquid assets would you include in your investment portfolio?

According to me first and most important thing is to maintain sufficient emergency fund that is enough to meet my 12 month expenses for cases of job loss, or any medical and other emergencies.

And I will start filling the emergency corpus piggy bank till it becomes my 12 months expenses, by segregating some amount each month from my salary. And this money I will invest in any liquid assets like Liquid mutual funds, bank FD, rather than keeping it idle and get beaten by inflation (purchasing power).

Secondly, all the extra savings that I have after meeting my emergency funds, I’ll segregate them in a ratio of 30/70. 30% of savings I would invest in safer assets and provide a guaranteed fixed return on my investments, some of these may be liquid but here the goal is safety on investments or risky less investment expecting market return. Remaining 70% on liquid assets like stocks, Real Estate, Gold, etc. for a long-term capital appreciation that gives CAGR of at least 12%-15% p.a. to achieve my long-term financial goals.

I would say that the ratio of liquid Vs illiquid assets in my portfolio would be approximately 35/65, considering my risk appetite and long-term goal. What about yours? comment below.