Understanding Asset Classes, Part 4: What are “cash” investments and what are their benefits?

In the fourth part of our series examining the main asset classes, we look at cash. Asset classes are groupings of similar types of investments, which are accessible to the investing public. So, what are “cash” investments, how do they produce returns and how can they benefit you as an investor?

What are “cash” investments?
Cash assets comprise a range of securities that basically take the form of short-term loans which pay regular interest, usually with a repayment period of less than a year. These securities can comprise of various types of money market instruments like certificates of deposit, bankers’ assurances, promissory notes and company commercial paper. The terms “cash” and money market” instruments are often used interchangeably.

How do they differ from other interest-bearing securities like bonds?
Given their short maturity period, the interest paid – and therefore the return to investors – is generally lower than bonds. However, they are also lower risk than bonds because of their shorter repayment period. Money market securities are among the lowest-risk investments held by unit trust funds other than physical cash (bank notes).

Asset managers buy a mix of money market securities issued by various companies, banks and government borrowers, with various maturities up to 12 months, to be held in their money market unit trusts and multi-asset unit trusts for their diversification benefits. Funds are priced daily and interest accrues daily. There are no charges to deposit funds or to redeem funds.

What are the benefits?
Not all investments are made with long-term growth in mind. At times you need your money to be easily accessible, yet safe, which makes a money market unit trust a suitable option. Not only do they offer better returns than the interest paid by a bank account, generally keeping up with inflation, but money market unit trusts are also more flexible than term deposits offered by banks - there is no fixed waiting period before withdrawing your money (like 90 or 180 days). This could suit you if you are saving money towards a down payment on a home or new car, or have a baby on the way.

What type of investor would it suit?
Money market funds are ideal if you are looking for a “parking facility” for your cash. They also make suitable “emergency” funds for unexpected expenses that arise. In the case of the Prudential Money Market Fund, the fund is recommended for risk-averse individuals wanting a short-term investment with protection from equity and bond market volatility, who need an inexpensive safe haven to house funds while earning above-inflation returns. The recommended investment horizon is one to 12 months.

If you would like to invest in the Prudential Money Market Fund, contact your financial adviser or our Client Services team on 0860 105 775 or at info@prudential.co.za.