What is a Cash Investment?

Cash investments are obligations that are mature in a relatively short period of time. The benefit of these types of investments is that it is possible to a return without the need to commit funds for an extended amount of time. Generally, a cash investment will reach maturity within three to six months, although some may require as long as one calendar year to mature.

A cash investment can usually be redeemed with relatively little effort. This factor makes an investment of this type ideal for anyone who needs to quickly convert an investment into cash for an emergency. While some cash investments may carry a small penalty for early withdrawal, others have no penalties at all.

While a cash investment can take several forms, there are three that tend to be the most common. Money market funds are one example. With a money market account, the fixed income assets backing the fund are generally low in risk and generate a small but steady return. The account also has a high level of liquidity, something that makes it ideal for use as a source of emergency or contingency funds.

Another example of a cash investment is a bank account that bears interest. Increasingly, banks are offering savings accounts that carry no penalties for early withdrawal, while still offering a competitive rate of interest. Some banks offer a slightly higher rate of interest as long as the account balance remains over a certain level. Once again, the funds in this type of cash investment are readily available should an unanticipated situation arise.

Short-term certificates of deposit, also known as CDs, are a third example of a cash investment. Today, it is possible to open a certificate of deposit with a maturity date of as little as three months. Generally, CDs of this type carry a fixed rate of interest, although there are some institutions that also offer a floating or variable rate with this investment option.

There is some difference of opinion as to whether a short-term bond issue can be rightly classified as a cash investment, even when the bond is set to mature in twelve months or less. The major objection appears to be that withdrawing from the issue early is generally not a simple process, and often involves selling the bond in order to recoup the original investment and any interest applied up to that point. Others feel that if the short-term bond will mature within six months to a year, it still meets the basic criteria as a cash investment, even though it may take a little more effort to convert the asset in the event of a financial crisis.