Investment

Cash basics

Cash plays an important role in an investment portfolio. You can use your funds to manage cash flows into other asset classes and you can also access your funds for day to day living expenses or life's little emergencies if you need to.

Typically, cash investments aim to provide income, liquidity and stable returns. Cash management trusts and funds usually invest in a range of short-term money market investments (that usually mature in 12 months or less) and provide the potential to earn higher returns than bank accounts and term deposits.

Types of investments

Cash investments can include term deposits, money market securities and cash management trusts. Term deposits usually offer higher returns than traditional bank accounts to compensate for the longer investment term. Usually, the higher the interest rate on offer the longer you need to lock your money away and the higher the risk.

Risk/return characteristics

Cash has the lowest risk of all asset classes. In fact, the 90 day treasury note interest rate is often the yardstick for a risk-free rate of return in Australia.

The short-term nature of cash investments makes them less volatile than other types of asset classes. While it is unlikely that the value of your capital will fall, most cash investments do not provide a capital guarantee. There is also the risk that your capital will not keep pace with inflation, and lose value in real terms.

The level of income from cash investments varies as interest rates move up and down. Interest rates typically rise with inflationary expectations. It also depends on the types and maturities of securities held.

Accessing cash investments

You can access cash investments directly via bank deposits, debentures and bank bills or indirectly via cash management trusts and managed funds. Managed funds provide a way of accessing a diversified portfolio of securities, which can include securities with different issuers, maturities and credit ratings.