You must always have a mix of investments in your portfolio. This mix should have high, medium, and low-risk investments. Moreover, liquid assets have a special place in everyone’s portfolio since they can help you during times of crisis. To invest in a case, some people may want to hold cash in their account, while others may invest in money market instruments that are equivalent to cash but with a return. Today, we will primarily discuss investing in cash and its advantages and disadvantages.
What is a Cash Investment?
By definition, cash investment refers to the short-term investment in liquid assets that can yield interest returns. The time period of the cash investment is usually less than 90 days. These are also considered to be risk-free investment options, and they offer a minimal return. Instead of having cash parked into the bank account, it is better to park that money in such instruments, offering you return and safety while maintaining liquidity. Cash investments have minimal exposure. They are not prone to market fluctuation. This is the reason why they are considered to be so safe.
What Are Different Types of Cash Investment?
There are different options available for cash investment. You can check out the various options available to you below.
- Bank Deposits – These deposits are highly liquid and can be linked to your saving account. You can alter the investment period, and the interest is in accordance with the same. In addition to this, you can also withdraw your investments anytime.
- Money Market – In the money market, two different types of assets are available. The first one is the treasury bills issued by the government and backed by the treasury department. The second one is the commercial papers which are promissory notes issued by the companies.
- Certificate of Deposits – The next option available is the certificate of deposit. These are certificates issued by the bank for the deposit made by the customer.
Advantages of Cash Investment
- Stable Returns – The fact that makes the cash investment so attractive is that they offer stable returns. The return that you will get at maturity is known to you, and you get that. There is no deviation in the returns from what was promised when you entered the cash investment. The return is low, but it is stable.
- Low-Risk Investments – Cash investments are often called risk-free investments. They do not have anything to do with the market risk and offer to fix a return guarantee. Even if the economy is in poor condition, you will get the promised return because of no risk associated with your investment. An example of this is the Treasury bill which is backed by the government.
- High Liquidity – Many people want a certain portion of their portfolio to be highly liquid. If you are also looking for something similar, there is nothing better than a cash investment. Holding cash in your account will make you lose on the interest income, but having cash investment will enable you to have liquidity without compromising on the returns.
- Regular Income Plans – If you make cash investments regularly, you can also make a regular income plan. You will get interest at the end of every period with the help of this, and the interest can be used as a regular income. So, you would need to configure your cash investment so that a portion matures monthly. The principal should be reinvested, and the interest can be used.
- Options for Bigger Investment – Many investments would require you to make a chunk of a down payment. For example, you would need money to make the down payment when buying real estate. The cash investment can help you prepare for such commitments. These can work as savings, which you can use for acquiring a bigger asset.
- Emergency Funds – It is always recommended that you should have your six months of income available as an emergency fund. The question is, how do you maximize the returns on the emergency fund without compromising liquidity? The answer is cash investment. You can save money in cash investment, serving as an emergency fund.
- Diversification – As your investment portfolio grows, you run out of options to diversify your portfolio. What is better than holding liquid cash? The cash investment will help you diversify the portfolio, and at the same time, it will also have other advantages.
Disadvantages of Cash Investment
- Lower Returns – One of the problems with cash investments is that they don’t offer great returns. The returns on the cash investment are usually equal to the repo rate offered by the central bank or the government. So, if you opt for cash investment, you need to let go of this aspect of cash investment.
- Macroeconomic Risks – There are macroeconomic risks that can’t be adjusted for. An example is a hyperinflation condition or the failure of the government due to an economic crisis. In such a case, a certain percent of the risk is induced in the cash investment. In addition, there is also a possibility that your investment will lose purchasing power.
- Inflation Risk – Every economy experiences inflation, and it is always good to have controlled inflation. However, if the inflation is more than the returns that you are expecting, then cash investment will lead to the destruction of wealth.
- Opportunity Cost – Lastly, an opportunity cost is associated with a cash investment. The same amount of money could have got you better returns, but since you are opting for the cash investment, you are losing the delta of return that you could have earned vs. what you are earning now.
It is always better to have cash investments in your portfolio, and by going through the advantages, we are sure that you will have realized why it is so important to have cash investments. Moreover, having cash investments is better than laying your cash idle in the account. The cash investments will help you generate some sort of return, even though it is minimal. Moreover, these investments would enable you to maintain a high level of liquidity, and they will also have the option to exit as and when required. So, with such benefits, make sure you invest in cash when managing your portfolio.