What are Cash Investments?
Cash investment refers to the Investment in short term instruments or saving account generally for the period of 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 other mode of investment.
These investments are highly liquid short term assets that can be converted into cash easily. These investments are also known as money market investments or cash reserves. Examples of cash investments include a certificate of deposits, Treasury bills, and saving accounts, etc.
- The amount invested in the cash investments usually offers the lowest potential return when compared with the other types of investment prevailing in the market, but at the same time, they also have the lowest risk, which can help the person investing in that to meet its short term goals without much risk.
- It plays an important role when it comes to constructing a diversified portfolio as is helps in complementing assets having a higher risk in the portfolio.
- For that reason, they are also considered as the ‘defensive’ asset, which helps in reducing the volatility of the portfolio.
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 which are sold on money markets, usually having a maturity period of less than the 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, and the Treasury bills, etc.
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#2 – Savings Account
A saving account is the deposit account held at the bank or the other financial institutions that provide interest on the amount deposited. The savings account is considered as 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
US Government issued the Treasury bill having the par value of $ 1,000, which is for $950. Treasury bill is issued with the promise to pay full par value to the investor at the time of maturity.
Now the government at the time of maturity will pay $ 1,000 to the investor being the full value of the Treasury bill. This will give a profit of $ 50 ($ 1,000 – 950) to the investor. The profit amount is considered as the interest earned.
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 capital, which is its primary advantage. It is also considered to be a very safe investment.
- When an unexpected emergency for cash occurs, then the cash investments help in meeting those unexpected expenses as they are highly liquid assets and can be converted into cash very easily. 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 the simple way to meet these financial obligations.
- As these investments are extremely liquid assets, they can exchange quickly for the products or services which the investor wants to avail as with a simple withdrawal; he can have immediate access to his money.
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 return, which the investment gives. These investments are safe in nature, so they don’t provide as much return which the risky investments provide. Less the risk undertaken, less will be the return on that less risky investment.
- As the return on the cash, investments are very less, so investors keep on identifying the amount of cash they need from time to time so that their money does not lie idle, and the overall return of the portfolio should not suffer. Due to this huge amount of time of the investor is spend on identifying his exact cash requirement.
- 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, then he usually has to forego the interest payments and, at the same time, may also be required to pay some amount of fee for early withdrawal.
- This investment is also referred to as a direct financial contribution of an individual or business to a venture, as opposed to the 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.
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 they keep on researching other investment products. This is beneficial in case of emergency of funds as the investor can have access to the money invested by him easily and within a short time period. The different cash investments include a certificate of deposits, Treasury bills, and saving accounts, etc., which provide stable and low-risk income to investors in the form of 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 –