Sara, a 50-year-old working professional, was in a car accident. She suffered some serious injuries and submitted a claim for permanent partial disability benefits with her insurance company. Her personal physician had already provided detailed documentation. But her insurance company requested her to attend an examination with another doctor, provided by them. This doctor, they said, is an "insurance doctor." Now, this was something new to Sara. But is it a new concept? Let us find out. Who Is an Insurance Doctor? Insurance doctors play a critical role in the insurance sector, which is quite underrated and misunderstood. Most of us assume that they actually replace the role of our treating physicians, but that is not the case. Our physicians treat us in case of any mishap, but they do not assess or evaluate our level of injury or disability. But then, who actually does it? This work is done by Insurance doctors, which, in turn, impacts or affects our insurance benefits. Th...
Significance of liquidity in investment:
One of the many factors that we consider while making an investment in an asset class is its liquidity level. Liquidity tells us how fast an asset or an investment can be converted into cash, and it is necessary to account for it because different investors have different risk profiles and financial goals.
Liquidity levels are determined by many factors, including the number of market participants, the volume of funds available in the financial market, financial regulations, and transparency levels in the market. Therefore, highly liquid investments can be converted into cash within a very short time, whereas assets with very low liquidity need a long time to be converted into cash.
Assets with low liquidity but high returns:
Here, we will learn about some assets that are considered to have very low liquidity levels, arranged in ascending order of liquidity.
1. Direct ownership in a private company - This asset or investment is considered the least liquid. Here, an investor directly owns shares of a company or is a partner in an entity, but such an entity will not get its shares listed in the stock exchange, even though it issues stocks and has shareholders. However, such an investment is considered least liquid in nature because there is no market where the shares can be sold immediately if required and, thus, cannot be converted into cash whenever needed. It is difficult to find a buyer for such stocks, and the transaction takes a long time to complete, typically in a few months. Over and above that, there are restrictions from regulatory bodies, making the process more complex.
2. Real estate - Real estate investments are more liquid in nature compared to direct ownership in private companies. It is an extremely lucrative investment option, but converting it into cash is very time-consuming due to a number of steps involved, which include finding a buyer, agreeing on the prices and other matters, inspecting, and closing the deal. Prices depend on factors like location, size, amenities, age of the property, market conditions, and so on. The entire transaction involves high costs, but its greatest disadvantage is that a property cannot be sold in parts.
3. Art and collectibles—Next comes this form of asset, whose investors are few. Selling such an asset is tough, mainly due to a lack of suitable buyers who can pay the price expected by the seller. This is not only time-consuming but also expensive.
4. Private equity and hedge funds - They are liquid to some extent and are primarily used to create a balanced investment portfolio. However, their liquidity is limited due to the lock-in period in such investments. They offer low risk but good returns.
Conclusion:
Thus, overall, asset classes with very low liquidity levels are great sources of high return. The only downside is its inability to get converted to cash immediately. If investors try to convert them to cash within a very short period, the risk of loss is huge, as they need to accept very low prices for the same. This also leads to inaccurate pricing and high sales costs. Investors should consider putting their money into such assets only after a proper analysis of their risk appetite, financial goals, and time horizon for investment.
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