Methodology

Investing Basics

Module 2

What is a portfolio?

Cash

Cash investments typically involve putting money into an account with either a bank, building society, or national savings organisation.

Cash investments are usually very familiar with most people, as they have already done it – whether they knew about it or not.

If you have opened a bank account and received interest on your savings, then you have undertaken a cash investment.

The cash deposited by an investor into their account, is used by the financial organisation in their own business. For a bank, they would use the money to give their other customers mortgages or personal loans.

They essentially borrow the money from you and pay an interest payment for the use of your money (usually less than 1%).

Interest payments are a source of income for the individual, who receives all of their money back after the organisation is finished with it. The individual usually won’t notice any difference in their account and can make transactions as if nothing has happened.

Risk & Cash investments

Cash investments are considered to be very low risk. This is the case because cash investments are considered to be protected by the government.

Should anything go wrong with the financial institution that you save with, it is highly likely that the government will step in. For that reason, cash investments are often seen as being almost risk free.

The official interest rate is referred to as the ‘risk-free rate’ in the world of investing.

As cash investments are considered to be very low risk, they usually offer very low returns. Many of you probably already know that banks have offered incredibly low returns in recent years, sometimes even as low as 0.10% per year.

The main risk with cash investments is whether returns will keep up with inflation or not. With the inflation rate usually standing at 2% per year, a return of 0.10% would mean that your money is actually reducing in value each year and not gaining in value.

How to make more from cash investments

With cash investment returns being so low, you may be wondering what you can do to increase your return.

An individual can make more money with cash investments by agreeing to not have access to their cash for a fixed term or by agreeing to give a certain notice period to access their money.

By doing this, investors can expect to earn a higher return, somewhere between 1% to 3%. The obvious downside is that you will not be able to access your money whenever you want to.

Another option is to guarantee that you will deposit a specific amount of money into your account each month. Many banks offer increased interest rates for customers that regularly deposit more than a certain amount each month (i.e. more than $1000).

The bank are willing to pay a higher return as they can rely on you to use that money in their own business. If they can make a larger return on your money, then they will obviously be willing to pay you a higher share of those profits.

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