5 things you should know about liquidity risk in investments

1. Liquidity risk implies that it is difficult to sell an investment when desired, or it has to be sold below its fair value, or there are high costs to carrying out transactions.

2. Some investments like certain real estate and art investments have illiquid markets as they are characterised by low volumes and high values.

3. The corporate debt market for retail investors suffers from lack of liquidity due to structural reasons and ready buyers are not available or an interested buyer may quote a lower price.


4. Some instruments may have a minimum holding period or a lock-in period when no transactions are allowed, or there is a cost like bank FD and some mutual funds.

5. Equity markets are deep and liquid. However, there are companies whose shares are not traded frequently and subject to liquidity risk.

(The content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)