What is cash and how do I invest in it?

From an investment perspective, 'cash' can mean several things, such as money in your bank account, money in a fixed deposit account, or an investment in a money market fund. All these have cash as their underlying source.

Almost all portfolios have a cash portion. Discussing your investment goals with a financial adviser will help you decide the exact percentage of this portion compared to your overall investment capital.

3 different types of cash investments

There are several types of cash investments. These include:

1. Fixed deposit account

A fixed deposit account is a type of savings account where you deposit your cash for a specified period of time in return for a fixed rate of interest, which is usually higher than what you'd receive from a normal bank account. Fixed deposit accounts typically require funds to be left in the account until the maturity date, and you may be penalised if you withdraw your funds early.

2. Money market account

A money market account is a type of savings account offered by banks that provides a competitive interest rate - usually higher than you would get on a normal savings account in exchange for larger-than-normal deposits. Some money market accounts place restrictions on the number of transactions you can make in a month. In addition, you usually have to maintain a certain balance in the account to receive the higher rate of interest.

3. Money market fund

A money market fund is a collective investment scheme (unit trust fund) and not a bank account. These funds invest in short-term, fixed income investments (ones that mature within a year) and offer flexibility and liquidity, so you can usually withdraw your funds via EFT or at an ATM. Money market funds usually offer higher interest rates than traditional savings accounts. That said, they're considered a relatively low-risk, low-return investment. Also, like other types of unit trust funds, money market funds incur expenses that you may be responsible for.

Investing in cash as an asset class

As an investor, there are a few things to consider when you and your financial adviser decide how much of your portfolio to allocate to cash or cash alternatives.

Who is cash suitable for, and when?

• Cash is suited to investors who prioritise stability over higher returns. Its focus is on providing a stable, low-risk return, or providing income for investors.
• Cash is suited to shorter investment terms due to its relatively low returns. Cash investments provide a good holding place to build up money that you actually want to invest for the long term once you find the correct fund.

Things you need to know about a cash investment

• Cash is exposed to inflation. This means you need to make sure that the returns you earn will still beat inflation once you've paid your taxes and fees.
• Cash is considered a liquid investment, which means there are fewer restrictions when it comes to withdrawing your money.
• Money market fund rates are variable, so they can change monthly depending on the performance of the underlying investments. The yield paid to investors can also differ from month to month.

How do I get started?

If you'd like to build your capital by investing in equities, speak to a financial adviser today. You can also learn more about other asset classes like equities, bonds, and property.