Cash equivalents as an investment vehicle
Cash! That thing we can never get enough of! Cash or equivalents – the thing we believe is money!
If you love having your money liquid (that is, available at the click of your fingers), then this asset class is for you.
This asset class is essentially short term loans to banks, governments and other reputable institutions who will pay back your money quickly.
In my personal opinion, the idea of cash and equivalents is more than this – it includes gold and other investments that are easily exchangeable for money and can give a return – but that’s just me.
Redefining cash as an asset class
Cash or equivalents have the following properties:
- It is highly liquid – i.e. you can exchange it for cash without hassle in a very quick time
- The investment term is less than 1 year
- It is easily accessible
From this definition, it becomes clear that the rands under your pillow aren’t the only cash asset you could have!
Types of investments and strategies
Concerning different strategies for investing in cash, it’s sort of difficult to say you have a strategy. It’s more like you’re keeping your money safe for a rainy day (such as in your emergency fund ). If you are looking for low returns that may or may not beat inflation, cash sure does help in getting it one step away from your spending habits! I will also discuss some indirect ways of investing – these might make your investing safer and more diversified:
- Short term government bonds: governments offer short term bonds, mostly of 3 months, that they use to cover short term debt.
- Money market account: You can even open one at your bank! Your bank basically uses this as a pool of money for liquidity and interbank lending.
- Money market funds: funds in general pools money together from investors. In this case, they invest only in cash and equivalent vehicles.
Other ways to save or invest:
- Cold hard cash: You could keep your money under your pillow, but this tends to not give any returns, doesn’t beat inflation and is quite unsafe – and this doesn’t necessarily give a return. That is unless you have USD or GBP under your pillow and exchange it for Rands (which is not recommended and illegal in South Africa).
- Gold – check out my article here!
There are other ways that funds invest in cash and equivalents such as commercial papers, but the normal joe would not really use these or have access to them
The pros and cons
As with all asset classes, cash and equivalents some interesting pros and cons.
- Liquidity! Money = money! If you’re looking to quickly take the money and spend it on something, this is it!
- Tangibility: You will have something physical in your hand to show for your money – and can move the asset or give it away.
- It’s so stable, it’s almost non-profit making – you might be able to beat inflation if you’re lucky
- It’s a great idea if you’re in between investments or old and retired – your money will be kept safe for a short term
If you think money markets are safe
Ask your bank/financial advisor/money person if your capital is guaranteed. In the past, some banks have taken from the capital of their clients to cover their losses! Many money markets funnds are actually unit trusts!
- Most money market investments do not offer above-inflation returns – it will most often just cover it or be 0.5% over.
- Money market fund fees can lower your earnings
- Cash and equivalents offer lower than average returns, as the risk is very low.
Quick tax overview
This article is not tax advice, but gives an overview of the asset class
Please speak to your tax advisor for your specific needs and analysis
For this section, I would like to give a special thank you to Andre Bothma (Twitter here) for his help and contribution.
Local interest received
If you invest locally in South Africa in a cash or equivalent asset class and get interest on your investment, you will need to pay interest.
Luckily, for individuals, the first R 23 800 interest is tax-free! If you are exceptionally old – like more than 65, you get R 34 500 tax-free!
If you made R 100 000 in interest and you are in the 40% tax bracket, the calculation will look like this::
R 100 000 – R 23 800 (Exclusion rate)
= R 76 200 Taxable
R 76 200 x (40/100) (from the 40 % tax bracket)
= R 30 480 payable to SARS
Foreign interest received
The South African government doesn’t like you taking your money overseas. You will need to pay the full tax rate of your income bracket for all interest earned.
If you made R 100 000 in interest and you are in the 40% tax bracket, you will pay 40% of your earnings to SARS:
R 100 000 x (40/100) (from the 40 % tax bracket)
= R 40 000 to pay to SARS
Ways to invest
Always check the fees involved in transactions
Many financial advisors and brokers charge money to invest. They often charge a fee of the entire fund value. Make sure you are clear about the cost of investing.
Here are a few options for investing in cash and equivalents:
- Money market accounts: Your bank should be able to offer you this – or at least the main four banks should be able to give you more information on what they offer, the interest rate and terms and conditions
- Money market funds: You can speak to your financial advisor or check out EasyEquities if you want to invest yourself – they should have options for funds that specialise in the money market
- Foreign Exchange (USD, GBP, EUR): Many banks offer foreign currency accounts. You can speak to your local bank about this as an option. The major banks offer this service.
If you need the cash quickly, then the asset class cash and equivalents are for you.
This is a low risk, low return investment.
Make sure you diversify.