Nobel‑prize winning economist Myron Scholes warned that during periods of market stress, converting ill‑iquid holdings into cash can become extremely expensive. The comment comes as Indian equity markets have seen heightened volatility, with the Sensex and Nifty oscillating amid global rate‑rise concerns and commodity price swings. For a retail investor, the message is clear: a portfolio heavy in hard‑to‑sell assets such as small‑cap stocks or real‑estate funds may force painful price cuts when liquidity dries up.
In practical terms, liquidity risk means that during a sharp correction, investors might be compelled to sell at prices far below intrinsic value simply to meet cash needs. Recent episodes, such as the abrupt pull‑back in foreign inflows and the sudden spike in oil prices, have shown how quickly cash can vanish from the system. Maintaining a buffer of liquid assets—whether in high‑yield savings, short‑term debt funds, or cash‑equivalents—provides the flexibility to ride out turbulence without resorting to fire‑sale decisions.
Financial advisors in India are therefore urging clients to reassess their asset allocation, ensuring that a reasonable portion of the portfolio remains readily accessible. A rule of thumb often cited is to keep at least 10‑15% of total investments in liquid form, especially for those nearing major life events or retirement. By doing so, investors can preserve capital, avoid forced disposals, and position themselves to take advantage of buying opportunities when markets stabilize.