What Is Liquidity?

Liquidity is the concept describing how quickly and easily an asset can be turned into cash without losing a significant part of its value. It has two dimensions: speed (how fast you can sell) and price concession (how much of its value you must give up to sell). A highly liquid asset can be converted to cash almost instantly and at a price very close to its true value; selling an illiquid asset either takes a long time or requires a discount to sell it quickly.

The liquidity spectrum: what is how liquid

Assets are not simply split into "liquid" and "illiquid"; they sit along a spectrum. From one end to the other:

• Very highly liquid: Cash, bank deposits and money market instruments (e.g. short-term repo, deposits, treasury bills). These turn into cash very quickly and without loss of value.
• Moderately liquid: Actively-traded stocks and bonds. They can usually be sold the same day, but the price fluctuates with market conditions.
• Illiquid: Thinly-traded securities, private company shares and long-dated or rarely-traded instruments; finding a buyer takes time.
• Very illiquid: Real estate and other real assets. A sale can take weeks or months and the price must be negotiated.

An asset's liquidity is not fixed either; when market conditions tighten, even an instrument normally considered liquid can become hard to sell at a reasonable price. Liquidity is a neutral property; "liquid = good" is not true. Illiquid assets can sometimes offer higher returns, but for a saver who may need access to cash, liquidity is an important practical dimension.

The two distinct meanings of liquidity for a fund

When it comes to an investment fund, the word liquidity can mean two different things, and they must be kept apart.

1. The liquidity of the assets the fund holds. Whatever assets a fund has built its portfolio from, the portfolio's liquidity depends on them. A fund holding mostly money market instruments and deposits has a highly liquid portfolio; one holding mostly thinly-traded instruments has a lower one. This affects the fund's capacity to meet investor redemptions.

2. The liquidity of the fund unit itself. This is how easily you can buy and sell your fund unit. In open-ended funds traded on TEFAS, the unit is issued and redeemed by the fund itself at the current unit share value, so you do not need to find a buyer. Even so, the transaction is not instant: the time you place the order and the value-date period come into play.

Unit liquidity: trading hours and value date (T+n)

You cannot turn a fund unit into cash "instantly"; two mechanisms intervene:

• Order cut-off (trading hours): Every fund has a daily cut-off time for accepting orders. A buy/sell order placed before this time enters that day's pricing; one placed after enters the next period.
• Value date (T+n): After you place a sell order, it takes a set number of business days for the cash to reach your account. "T" is the transaction day and "n" is how many business days later payment is made. For example, T+1 means the next business day, T+2 two business days later. This period varies by fund type and is usually shorter for money market funds.

Together these two arrangements determine a fund unit's practical liquidity: when you place the order and how many days later the money reaches you. Each fund's own cut-off time and value-date period are listed on the Fund Trading Hours page.

Fund size, investor count and the money market fund

There is a practical relationship between liquidity and fund size and investor count. In a fund with many investors and a large asset base, the effect of individual entries and exits on the fund's operation stays relatively small; daily trading depth is greater. In a very small fund with few investors, a large exit may require selling part of the portfolio.

This is why a money market fund is typically considered the most liquid type of fund: its portfolio is made of highly liquid instruments, and thanks to its low volatility and short value date its unit converts to cash very easily. This page does not say which fund should be preferred; it only explains what liquidity means and how, for a fund, it is read at two different levels.