Too many illiquid products in a portfolio can spell trouble for investors

When selecting instrument, pay attention to potential return, risk and how easily you can exit it

Recently the Bombay Stock Exchange and the National Stock Exchange issued lists of 283 and 16 stocks, respectively, advising investors to exercise extra caution when investing in them owing to lack of liquidity.

Liquidity risk implies that the investor may either not be able to sell an investment when he wishes to, or may be forced to sell it at a discounted price. If the larger part of your portfolio is locked up in illiquid instruments, it can pose a serious problem.

On the equity side, small-cap stocks tend to have low liquidity as institutional investors like FIIs steer clear