How much cash to hold in a savings account while waiting for a market correction?

I have a substantial amount sitting in my savings account because I’m waiting for a better entry point in the market. How do I decide how much cash is sensible to hold and how much is simply money sitting on the sidelines?

– Name withheld on request

When markets are uncertain, holding some money in your savings account can provide a sense of security. You have the flexibility to invest if markets correct, but how do you know when the right time to invest is? Even though holding cash may feel like the safer choice, it may not always be the right one. So, where do you start?

A good place to start is by setting your financial goals and looking at when you will need the money. Goals that are one to two years away need greater stability, so the money can be kept in debt. For goals that are two to five years away, you can consider a mix of equity and debt. Goals that are more than five years away give you more time to take a growth-oriented approach.

Build a mix

Once you have clarity on your goals, look at your overall asset allocation. For a long-term portfolio, you can consider allocating 60–80% to equity, with the remaining amount invested in debt-oriented products. Equity can provide the growth needed over the long run, while debt can bring stability to the portfolio. As you get closer to a goal, you can gradually move the money towards more stable investments.

Once you have decided your asset allocation, the next step is to choose the right investments within each part of the portfolio. For equity, around five funds across categories such as large cap, mid cap, small cap, flexi cap, and multi cap can be a starting point. The right combination will depend on your existing portfolio and the diversification you need. For the debt portion, options such as target maturity funds or arbitrage funds can be considered, depending on your tax bracket and liquidity needs.

Protect the plan

There is another part of the plan that is important when you are investing for the long term. An emergency fund covering at least six months of expenses, along with adequate term and health insurance, can provide a cushion when an unexpected expense comes up. This reduces the need to dip into your long-term investments when markets may not be favourable.

Now, coming back to the money sitting in your savings account, you don’t necessarily have to wait for a market correction before putting it to work. If you are comfortable investing the entire amount, you can invest it as a lump sum. If investing a large amount at one go makes you uncomfortable, you can use a staggered approach, where the existing lump sum is invested in smaller portions over a period. An SIP, on the other hand, involves investing a fixed amount regularly and is generally used for investments made from regular income.

Don’t time it

Whichever approach you choose, it is better not to wait for the “right” time to invest. Markets can continue to rise while you wait. Even when markets fall, it is difficult to know when they will start rising again. This can lead you to keep watching the market and waiting for the right opportunity, while missing out on market gains in the process. Frequent changes to your investments can also increase costs and, depending on the investment and holding period, have tax implications.

Ultimately, cash is sensible when it has a purpose. Once you have decided how much you need to keep aside, the remaining amount should not stay in your savings account indefinitely in the hope of finding the perfect entry point. Give that money a plan and let your investment horizon, asset allocation, and risk appetite guide how you put it to work.

Feroze Azeez is joint CEO at Anand Rathi Wealth Limited