4 Asset classes
Cash
Cash management trusts are a form of managed investment in which the primary investment is cash. While offering security, they can also offer the potential for a higher return than an ordinary bank savings account.
Cash management trusts typically invest in a wider range of securities than a bank savings account, and therefore can provide a better rate of interest. How? By investing in the short term money market.
Money markets facilitate the transfer of cash between borrowers and lenders. The short term money market is a market that invests primarily in short term money and short term securities, for example bills of exchange and certificates of deposit. In this market, short term typically refers to investments that last less than 12 months.
Making the most of cash
Investors who put their money into a ordinary bank account will know there is little risk of losing money over short periods of time, as cash is the least risky asset class. Cash is a sensible investment for money that you would like to have access to in the short term.
Most, if not all New Zealanders will have at least one bank savings account into which we put our wages or salary, and from which we pay our bills. However we often seem to use our bank accounts as our primary savings vehicle as well. While cash in a bank savings account is very secure, it does not offer any capital growth.
Inflation erodes the value of cash investments over time
Investors who leave their money in the bank over longer periods of time (say three years or more) run a different type of risk - the risk that the value of their money may be eroded by inflation.
Though money held in cash is earning a small rate of return, the cost of living continues to rise. As a result, the real rate of return on a cash investment (the return after you take away the inflation rate), can be very low, especially after you have paid tax on the interest!
For those investors wishing to put some of their money aside for a 'rainy day', a planned short-term expense like home renovations, or as a parking place in between investment decisions, investing in cash via a cash management trust may be an ideal solution.