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C Is For Cash Investments

| Investment Landscape

Returns on cash investments are considerably lower than on other investments

Cash investments are normally short-term commitments, often only for 90 days or even shorter periods. The returns they offer are in the form of interest payments. Market interest rates dictate how much you, as an investor, can earn on your cash. While it is possible to earn annual returns of 8% or higher on investments in stocks or shares, the return on a cash investment may only be 1% per year.

However, given that South African interest rates are currently at record lows, the real (after-inflation) return on cash investments in South Africa is currently close to zero. This is not vastly different from many other major economies: in fact, it has been -2% in the US.

Cash investments include call accounts, deposit accounts with fixed notice periods (some require as little as seven days’ notice) and money market funds. In some instances, call and fixed deposit accounts are also available in foreign currencies (dollars, euros and sterling).

Cash investments are associated with extremely low levels of risk

If you are investing your money in cash, you are unlikely to lose the money you initially invested – a risk you do face when you invest in any of the other major asset classes. However, you do face the risk of interest rates declining, as well as inflation steadily eating away at the purchasing power of your money over time.

Cash investments give you quick and easy access to your money

A big advantage of cash investments (unless you are in a long-term fixed deposit account) is that you can access your money very quickly and easily. Withdrawing your money in the case of an emergency, or when a better investment opportunity arises, is virtually hassle-free.

Generally speaking, cash investments do not offer inflation-beating returns

In a low interest environment, South African investors need to bear in mind that it is no longer possible for them to take very little risk – by investing mainly in cash, for example – and still earn inflation-beating returns.

Interest rates are expected to remain low for the foreseeable future. So investors who rely on income will need to take on more risk if they want to achieve higher income distributions. To do so they will need to invest in longer-dated bonds, corporate bonds, listed property and equities and not just cash.

Inflation, as measured by the consumer price index (CPI), has breached 6% but we expect it to average 5.25% during 2014. Money market funds are yielding about 5% a year. This means that currently money market funds are losing ground against inflation, especially in cases where investors pay tax on the interest.

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