The methods below will allow you to continue to make a profit off your cash assets but always do your thorough research to find the right option for your needs.
Possibly the most critical asset for any investor is cash. It’s the safest and most easily accessible form your assets can take, but the drawback is that it also generates the lowest returns.
While having a ready supply of cash at your disposal as an investor is essential, you should always ensure it generates a return rather than just sitting unused. According to a report, cash assets only generated an average 3.6% return over ten years.
Due to the low returns, you’ll want to choose the right ways to invest your cash in maximising what little you can gain. Each of the following options has its advantages and disadvantages, so weigh them up carefully before you invest.
1. Cash funds
Cash funds usually involve an investment manager pooling investors’ cash into financial products such as bank deposits, money market instruments, and fixed-income securities. These investments generally provide the lowest risk out of cash investment products but generate the lowest returns.
The advantage of cash funds is that they’re highly liquid — you’re free to take your money out of them when you need it. They’re also good during slow markets when risks are higher, and profits are lower. But here’s the downside, your cash investment’s real-terms value may be reduced if left for extended periods due to higher inflation than savings rates.
2. Enhanced cash funds
Like regular cash funds, these invest cash into various financial products. The difference is that enhanced cash funds use a much more comprehensive range of products. Sometimes even debt and mortgage-based securities give ECFs an enhanced return potential at the cost of increased risks:
- Credit risk: The risk of losing capital due to the issuer of debt-based security defaulting on the loan.
- Term risk: The risk of interest rates changing during the fund’s term.
- Liquidity risk: This is the risk that you won’t be able to easily convert your securities back into cash without loss of capital.
In essence, enhanced cash funds trade some of the safety and liquidity of regular funds for a higher potential return. Always be aware of precisely what products an enhanced fund entails so you can assess the risk, and be aware that, as with regular funds, management fees can chip away at your returns.
3. Fixed-term deposits
Term deposits are the safest, most transparent option when investing cash. These deposits will clearly state their conditions — how much you can deposit, how long the deposit is held for, and what your return will be at the end. These conditions vary wildly depending on the provider, so research your options thoroughly to find one that best suits your needs. The disadvantages of term deposits are less liquid and require more active management to maximise returns. Your deposit will usually be inaccessible for the specified term, and early exit fees may apply if you withdraw it before it matures. Once it does mature, the interest rate will drop dramatically, so you need to be ready to move your cash to a different term deposit as soon as your current one ends.
4. Cash-based ETFs
Exchange-traded funds (ETFs) are a parcel of investments traded like a single stock. Different ETFs focus on different products or indices. Therefore, cash-based or money market ETFs provide a bundle of different cash options in a single unit.
An ETF provides easy diversification of your cash investments. Instead of placing all your eggs in one basket by sticking with only one option or juggling several different cash investments, ETFs allow you to put your money into a range of products with a single investment.
ETFs also remain relatively liquid, depending on their terms. However, as a traded stock, they may incur brokerage fees when buying or selling them, and like cash funds, they may also incur management fees, chipping away at your returns.
