Cash Investment

Updated on April 23, 2024
Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

What Are Cash Investments?

Cash investment refers to the Investment in short-term instruments or savings accounts generally for 90 days or less that generally carries a low rate of interest or the return with a comparatively low rate of risk in comparison to another mode of investment.

Cash Investment

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These investments are highly liquid short-term assets that can be converted into cash easily. Examples of cash investments include a certificate of deposits, Treasury bills, saving accounts, etc. These investments are also known as money market investments or cash reserves.

Key Takeaways

  • Cash investment involves allocating funds to short-term instruments or savings accounts with relatively low-interest rates, typically held for 90 days or less. It is considered a low-risk investment option.
  • Cash investments can be easily converted into short-term assets and include instruments such as certificates of deposit (CDs), Treasury bills, savings accounts, money market investments, and cash reserves.
  • Investors have various cash investment options, including money market instruments and savings accounts. These investments offer low-risk income through interest payments and provide easy access to funds during emergencies.

How Does Cash Investment Work?

Cash investments denote some financial assets that can be held in the form of cash or cash equivalent. These investments are highly liquid short term assets 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 short-term 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.

These kinds of investments are preferred options for organizations as well as individuals who prefer safety of investments and has a low risk-taking capacity. They are satisfied with low return provided returns are guaranteed and ensures a fixed cash flow at regular intervals.

Such kind of investment options offer opportunity for keeping money on a temporary basis for short term. The feature of high liquidity adds to their importance because they can be used in case money is required suddenly for some emergency purpose. It is also suitable to keeping money safe while awaiting for a better investment opportunity in future.  

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Strategies

A few strategies related to the best cash investments process given below.

  • 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.
  • The amount invested in best 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

Cash Investment Types

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There are different types of short-term 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 paper, Treasury bills, etc. They are widely used cash investment platform for people who prefer safety and security over high risk and high return.

Certificate Of Deposit

They are also called time deposits and have a fixed term for investments, which may range from a few months to a few years. They offer interest rates at fixed intervals that are higher than the interests offered in savings accounts. But if the investor wants to withdraw the amount at an earlier date, they need to pay a penalty charge for it.

Treasury Bills

Treasury bills or T-Bills are debt securities fro short term which are issued by the government. They have maturity dates that may vary from a few days to a year. They are considered very safe since they are backed by the government with full faith and credit.  

Commercial Papers

Commercial papers are issued by corporations. They are actually short-term loans that these corporations take in order to meet their financial need to run the day-to-day operations. Their maturity period may range from a few days to a few months and are typically unsecured.

#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 a cash investment platform that 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.

Examples

Let us look at some examples to understand the concept.

Example #1

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.

Example #2

Here is another example with another type of cash investment option. Ned is a retired individual who is looking for some safe investment avenue that will offer an interest at regular intervals and has minimum level  of risk. For such kind of investors, certificate of deposit is the best option since they offer interest higher that savings account at an annual basis but at the same time the risk is very low. Such investors are ready to accept low return since their risk appetite is low.

Thus, the above examples give us a detailed idea about some types of options where money can be kept as per the profile of the investor.

Advantages

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

  1. It leads to the preservation of the capital, which is its primary advantage. It is also considered to be a very safe investment.
  2. When an emergency for cash occurs, cash investments help meet those unexpected expenses as they are highly liquid assets 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.
  3. As these quick cash 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:

  1. The main disadvantage of the cash investment relates to the overall rate of return 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.
  2. 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.
  3. 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.

Thus, it is necessary to look at both the advantages and disadvantages of these type of investment opportunities and then take an informed decision regarding the same, based on financial goals, risk appetite, suitability of time period that are offered in each types of cash investments and also the penalty charges applicable for each of them, if any.

Frequently Asked Questions (FAQs)

1. Are there any limitations or restrictions on accessing funds from cash investments?

The limitations or restrictions on accessing funds from cash investments depend on the specific type of cash investment chosen. For example, cash investments like savings or money market accounts may have withdrawal limits or require advance notice for larger withdrawals.

2. How does inflation impact the purchasing power of cash investments?

Inflation erodes the purchasing power of cash investments over time. The currency’s value decreases as the general price level of goods and services rises. If the interest earned on cash investments does not outpace inflation, the real value of the investment will decline. This means that the purchasing power of the cash investment will be reduced, and it may not be able to buy the same amount of goods or services in the future.

3. Are cash investments insured or protected in case of financial institution failures?

The level of insurance or protection for cash investments in case of financial institution failures varies depending on the jurisdiction and the type of account. In many countries, savings and money market accounts are typically insured by government-backed deposit insurance programs up to a certain limit per account holder, such as the Federal Deposit Insurance Corporation (FDIC) in the United States.

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