What are cash investments?

Although cash offers the lowest potential return of all the investment types, it is also the lowest risk and can help you meet short term goals as well as complementing higher risk assets in your portfolio.

Cash investments include money in bank accounts, savings accounts and term deposits and can provide stable, low-risk income in the form of regular interest payments.

As a result, they are considered as a ‘defensive’ asset that can play an important role in helping you reduce the volatility of your portfolio.

 

Term deposits

If you put your money in a term deposit, for example, you will receive a fixed interest rate in exchange for depositing it with the issuer for an agreed period of time.

Term deposits allow you to choose how long you want to invest for and the interest rate is generally higher for longer terms than for shorter terms.

 

What are the benefits of term deposits?

  • High interest. You can often earn a higher interest rate on term deposits than you can on high-interest savings accounts.
  • Guaranteed income. The interest you will earn is fixed at the start of the term and does not fluctuate if official interest rates change.
  • Optional terms. You can choose how long you want to invest in a term deposit, with options typically available from three months to 60 months.
 

What other cash investments are there?

There are also some investment funds that focus on cash, including exchange traded funds, which are listed on the Australian Securities Exchange (ASX). These funds pool together the money of investors and invest in cash related assets.

 

What are the risks of cash?

The major issue to consider with term deposits is the lack of access to your cash during the fixed term. If you decide to withdraw mid-term, you will usually forego interest payments and may be required to pay a fee.

If the rate of interest you receive is lower than the rate of inflation, then the value of your money would not actually be growing in terms of your spending power. But it’s important to consider the returns you get from your portfolio as a whole, not just from one asset.

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