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Being asset rich and cash poor


 

A state of being asset rich and cash poor is one in which the person almost has his or her entire net worth in the form of assets – real estate, family businesses or paper assets like shares and stockholding in companies; while they have very little cash on hand. And there are a lot more people who fall in this category than one would imagine.

Promoters, stakeholders and businessmen

Most of the well known business magnates and multimillionaires of this country, apart from a large number of smaller businessmen fall in this category. These are people who plough back any profits they make and any liquid cash in to their businesses with an aim to grow/ expand further. During the course of my profession, I once happened to meet one such gentleman who had a net worth of around 10 crores, but had NO fixed deposits and the sum total of the savings bank balance of all his accounts put together was hardly a lakh of rupees! The reason why he and many others do so, according to him is that since they know their business very well and are passionate about making it bigger, they prefer to invest in their own businesses or buy stocks or high risk instruments which have the potential to give higher returns and hence find fixed deposits with a taxable rate of interest of 8 % or 9% neither interesting nor lucrative.

Stock market traders and investors

This segment comprises of avid stock market investors both who invest over the long term and the day traders, people investing in derivatives and options, bullion etc. Not only do these people have very little cash on hand, many of them have highly leveraged positions. That is, they borrow from the market to invest, or use margin trading.

Real estate developers and investors

Most real estate developers have two or three ongoing real estate projects simultaneously and they are always short of cash. There are a small segment of people too, who love buying land or houses hoping for a good return over the medium term, and invest the majority of their assets in real estate.

But, is there something wrong with being asset rich and cash poor? After all, an asset by definition means something whose value appreciates over time, while holding too much in cash is perceived as compromising on returns, or an opportunity loss.

All this works fine till the going is good. But situations of economic downturns and stock market downtrend like the one we faced in India recently saw the net worth of people in the above mentioned category shaved off by around hundreds of crores. Moreover, most of these assets, like majority stake holdings in companies and real estate investments etc. are not very easy to liquidate fully for cash, especially during a economic slump; leaving many of these people with absolutely no liquidity or cash in hand.

So, it is best to have a diversified portfolio of assets with a proportionate allocation to assets which can be converted to cash readily like cash in bank, fixed deposits, bonds, income and debt mutual funds etc.

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