What are Cash Investments?

These investments are highly liquid short-term assets that can be converted into cash easily. Examples of cash investments include a certificate of depositsCertificate Of DepositsA certificate of deposit (CD) is an investment instrument mostly issued by banks, requiring investors to lock in funds for a fixed term to earn high returns. CDs essentially require investors to set aside their savings and leave them untouched for a fixed period.read more, Treasury billsTreasury BillsTreasury Bills (T-Bills) are investment vehicles that allow investors to lend money to the government.read more, saving accounts, etc. These investments are also known as money market investmentsMoney Market InvestmentsThe money market is a financial market wherein short-term assets and open-ended funds are traded between institutions and traders.read more or cash reserves.

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  • The amount invested in cash investments usually offers the lowest potential return compared with the other types of investment prevailing in the market. Still, at the same time, they also have the lowest risk, which can help the person investing in them to meet their short-term goals without much risk.It plays an important role in constructing a diversified portfolio as it helps complement assets having a higher risk in the portfolio.For that reason, they are also considered the ‘defensive’ asset, which helps reduce the portfolio’s volatility.

Types of Cash Investments Options

There are different types of Cash Investments Options where the investors can invest their money.

#1 – Money Market Instruments

Money Market instruments are the very short-term debts and securities sold on money markets, usually having a maturity period of fewer than six months. Money Market instruments are highly liquid investments, i.e., they can be converted into cash easily and pay interest on the investment at the variable interest rate, which is slightly higher than the return earned on the cash savings account. The different examples of the same include commercial paperCommercial PaperCommercial Paper is a money market instrument that is used to obtain short-term funding and is often issued by investment-grade banks and corporations in the form of a promissory note.read more, Treasury bills, etc.

#2 – Savings Account

A savings account is a deposit account held at a bank or other financial institution that provides interest on the amount deposited. The savings account is considered an alternative for investment in cash by some people. The interest rate, however, is very minimal on these accounts. The interest on savings accounts depends on the bank or financial institution in which the account is there. Some institutions may also charge fees on these accounts unless a certain average minimum monthly balance is maintained in the account.

Example of Cash Investments

The US Government issued the Treasury bill having the par value of $ 1,000, which is for $950. A Treasury bill is issued with the promise to pay full par value to the investor at maturity.

At the time of maturity, the government will pay $ 1,000 to the investor as the value of the Treasury bill. This will give the investor a profit of $ 50 ($ 1,000 – 950). The profit amount is considered as the interest earned.

Advantages

There are several different advantages of Cash Investments, providing the opportunity for investors to invest their money in liquid assets. Some of the advantages are as follows:

  • It leads to the preservation of the capitalPreservation Of The CapitalPreservation of capital is a conservative investment approach intended to protect money and avoid losing value in a portfolio.read more, which is its primary advantage. It is also considered to be a very safe investment.When an emergency for cash occurs, cash investments help meet those unexpected expenses as they are highly liquid assetsLiquid AssetsLiquid Assets are the business assets that can be converted into cash within a short period, such as cash, marketable securities, and money market instruments. They are recorded on the asset side of the company’s balance sheet.read more and can be easily converted into cash. It thus prevents the investor from selling assets like stocks or bonds, which might be part of some of its portfolio. Thus holding cash investment is a simple way to meet these financial obligations.As these investments are extremely liquid assets, they can exchange quickly for the products or services that the investor wants to avail of, as with a simple withdrawal; he can have immediate access to his money.

Disadvantages

Along with the different advantages, it also has some limitations and drawbacks, some of which are as follows:

  • The main disadvantage of the cash investment relates to the overall rate of returnRate Of ReturnRate of Return (ROR) refers to the expected return on investment (gain or loss) & it is expressed as a percentage. You can calculate this by, ROR = {(Current Investment Value – Original Investment Value)/Original Investment Value} * 100read more that the investment gives. These investments are safe, so they don’t provide as much return as risky investments. The less the risk was undertaken, the less the return on that less risky investment will be.Due to this huge amount of time the investor is spending on identifying his exact cash requirement. As the return on the cash, investments are much less, so investors keep identifying the amount of cash they need from time to time so that their money does not lie idle. The overall return of the portfolio should not suffer.In the case of cash investment also, some of the deposits have fixed tenure, and in case the investor decides to withdraw his money mid-term. He usually has to forgo the interest payments and, at the same time, may also be required to pay some amount fee for early withdrawal.

Important Points

  • This investment is also referred to as a direct financial contribution of an individual or business to a venture, as opposed to borrowed money.Usually, these investments are undertaken by those who require a temporary place to keep their cash while they keep on researching other investment products.

Conclusion

These investments are highly liquid short term assetsShort Term AssetsShort term assets (also known as current assets) are the assets that are highly liquid in nature and can be easily sold to realize money from the market. They have a maturity of fewer than 12 months and are highly tradable and marketable in nature.read more that can be converted into cash easily. They have a minimum amount of risk as required by some investors, but at the same time, they offer a very low rate of return, which might not attract some. Generally, these are undertaken by those who require a temporary place to keep their cash while researching other investment products. This is beneficial in case of an emergency of funds as the investor can easily access the money invested by him easily and within a short period. The different cash investments include a certificate of deposits, Treasury bills, saving accounts, etc., which provide stable and low-risk income to investors through regular interest payments.

This has been a guide to Cash Investment. Here we discuss the different types of cash investment options, including the money market and savings account, along with examples, advantages, and disadvantages. Here are the other articles in finance that you may like –

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