Cash & Cash Equivalents is an Asset Class where the money you invest can be very easily and quickly converted back into cash or be held in an account as cash itself. This Asset Class is considered ‘High Quality Liquid Asset’ – meaning this is as good as holding cash.
Investments are generally short-term in nature, meaning a holding period of less than 1 year. Investments usually make a return which is calculated as interests accrued or earned over the period of the investment.
Example of Cash Equivalents investments:
Bank Deposits such as Fixed Deposits, Savings Account and interest bearing Current Account
Short-Term Treasury Bills, Government Bonds (high quality like UK Gilts), High Quality Corporate Bonds
Money Market Funds – a fund setup with a combination of the above possible investments
Cash Equivalents allow investors (you) to invest money in assets that generate some returns. These investments will not make you rich. But, these investments will prevent erosion or deflation of value.
For example: If you continued to hold just ‘Idle Cash’ in your bank account, and price of all the products that you normally purchase went up by 5% over the next 12 months, you have to pay 5% more of your ‘Idle Cash’ to buy the same product in 12 months. However, if you invested your idle cash in a Cash Equivalents asset class that returned 5% in 12 months, you can buy the same product at pretty much current levels in 12 months i.e. the returns on idle cash can be used to at least meet the increase in expense due to inflationary pressures if not more.
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