Updated July 18, 2023
Definition of Cash Investment
Cash investments refer to those short-term investments usually for a period of 90 days or less that yields return in the form of interest incomes. Since the cash investments are for the short term, they offer a lower rate of return and also carry a less level of risk as compared to other investments.
There are certain short-term investments having maturity (if any) up to 90 days that earn interest incomes as returns. These investments are known as cash investments. It is a normal fact that investments made for short-term yield lower returns and the same is the case with cash investments since these are also short-term investments. Thus, the rate of interest earned on these investments is lower than other investment options. These investments are less prone to market fluctuations and are thus considered as safe. Investors who want to invest in safe options can invest in cash investments.
Example of Cash Investment
Examples of cash investments include the following:
- Savings Bank Deposits: It represents the amount lying in your saving bank accounts that you can withdraw any time you want.
- Certificate of Deposits: These are the certificates issued by the banks representing the deposits given by the customers for a certain fixed period of time.
- Treasury Bills: They are the debt instruments issued by the US government and the same are backed by the Treasury department.
- Commercial Papers: Commercial papers are the promissory notes issued by the companies in exchange of short-term funds taken as borrowings.
- Term Deposits with Maturities up to 90 Days: These represent the bank deposits of the account holders such as fixed deposits or recurring deposits.
Types of Cash Investment
Following are the types are given below:
1. Bank Deposits
Bank deposits represent the amounts deposited with the banks or other financial instruments that yield interest at regular intervals such as quarterly, monthly, half-yearly, or yearly. There can be different kinds of deposits such as saving deposits, term deposits, and recurring deposits. The amounts lying in saving deposits can be withdrawn by the holders at any time while for other deposits the amounts are invested for a fixed period of time. Thus, only those deposits that have a maturity of up to 90 days shall be considered as cash investments.
2. Money Market Instruments
Money market instruments refer to the financial instruments that are raised by banks, other financial institutions, businesses, and the government for raising short-term funds having a maturity of up to one year. The period for which the funds are raised can be overnight, a few days, weeks, and so on. Examples of money market instruments include treasury bills, commercial papers, promissory notes, etc.
3. Certificate of Deposits (CDs)
These instruments are issued by banks wherein the banks pay interest at the fixed rates on the amounts borrowed by the banks from the depositors for a fixed time. The maturity period for these deposits is usually less than a year.
Importance of Cash Investment
Cash investments are seen as an alternative to keeping money in cash form. Idle cash yields no returns and investors feel it’s better to invest the same in some short-term avenues generating regular returns. Further, since cash investments are short-term investments, they provide a high level of liquidity to the investors and the funds need not be blocked for a long time by the investors. Another thing that works in favor of investors is that these investments are less risky and thus those investors who have a lower risk appetite can invest in these instruments.
Advantages of Cash Investment
Some of the advantages are given below:
- Safe Investments: The cash investments carry a low level of risk and represent a safe investment option. This is because cash investments are fixed income instruments and as a fact fixed income instruments are less prone to risk.
- Stable Returns: These investments earn income by way of interest on a periodic basic say monthly, quarterly, and so on. Thus, a regular income is earned by the investors.
- High Liquidity: Cash investments involve investing the funds for a short span of time. Those investors who don’t want to block funds for longer can consider investing in cash investments as these instruments are highly liquid.
Disadvantages of Cash Investment
Some of the disadvantages are given below:
- Interest Rate Risk: Cash investments earn income by way of interest and thus they carry interest rate risk. Interest rate risk refers to the risk that the value of an investment will fall as the interest rate rises. This is because there is an inverse relationship between interest rate risks and the value of investments.
- Lower Returns: The investments are made for short-term and thus lower returns are generated as compared to other instruments which can provide much higher returns.
Cash investments are an alternative to keeping idle cash. They offer reasonable returns to the investors and provide a high level of liquidity. Thus, investors can take an exit within a short period and need not stay invested for long.
This is a guide to Cash Investment. Here we also discuss the definition and types of cash investment along with advantages and disadvantages. You may also have a look at the following articles to learn more –