How much cash should you hold?

How much cash should you be holding at any moment in time, this is a very debatable topic as it varies from individual to individual. Many argue it depends upon your age and the range may vary from 5 to 20 per cent of your total portfolio. Holding cash has its pros and cons. In a bull market, besides, the loss of opportunity, it also leads to lower returns than inflation. Nevertheless, the proponent of holding cash argue that a bad market fall will wipe out most of your gains and at the same time you will not have enough cash to exploit the opportunity provided by the fall in the market.

As the arguments of both the sides look equally alluring, how should you decide on the level of cash you should be holding? Although there are various ways to decide upon your cash level, these are the broad contours, which will help you take a right decision.

Daily expenditure: An ideal cash level is maintaining atleast 4-6 months of your daily expenditure. These expenditures include expenses like, rent, food and your utility bills.

Large one-off expenditures: If you are planning for your marriage or your child’s marriage or planning to buy a new car or house, you should hold enough cash to cover these expenditures.

Other commitments: Besides the above commitments, if you have a large number of people dependent upon you, then you need to more cash to meet any emergencies.

Stability of your income: If you are in a job that pays you a regular salary, you can go for lower cash in hand as you know on a certain date a certain amount of money will be credited to your account. But for a businessman whose cash inflow is unstable and depends upon his execution of contracts, it is advisable to hold larger amounts of money in cash.