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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Evaluating the Financial Position of Clients

In personal financial planning, which of the following ratios is computed as liquid assets divided by monthly non-discretionary cash outflows?

The emergency fund or liquidity ratio equals liquid assets divided by monthly non-discretionary cash outflows. It tells how many months of essential expenses the client can meet from liquid resources if income stops, unlike savings, debt service or solvency ratios, which use different numerators and denominators.

  1. ASavings ratio
  2. BEmergency fund (liquidity) ratioCorrect
  3. CDebt service ratio
  4. DSolvency ratio

Explanation

The liquidity ratio divides liquid assets by monthly non-discretionary expenses and shows how many months the client can survive without income. The savings ratio uses savings over gross income, the debt service ratio uses EMIs over income, and the solvency ratio uses net worth over total assets.

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