Investing Cash

By: Emma Bunting
Cash on deposit in a bank or building society can earn interest. The amount of interest that you will receive depends upon a number of different things:

*The general level of interest rates set by the Bank of England

*The size of your investment may attract higher interest rates

*How long you are prepared to wait before withdrawing your money
Saving accounts or National Savings products which offer interest, is the way most people start investing. But there is some risk involved as the interest you receive after tax may not be enough to allow the value of your cash to keep up with inflation. In the long term this can mean that your money loses value in terms of what it can buy. A £1 coin will always be worth £1, but what you can buy with that coin will reduce with inflation.

Characteristics:

•Safe / Low risk

•Growth in the long term

•Easy to access to your money ( very liquid )

•Little income

•Risk in terms of inflation

Suitable in the case of:

•Use as a transaction account

•Keeping cash on hand for short-term in case of emergencies

•"The need to spread the investments" in your portfolio i.e. diversificaton

•Short-term savings where you cannot afford any risk with your capital

Types of cash:

•Current accounts

•Term / Savings accounts

•Money market accounts

•Certificates of deposits
•Cash Management Trusts or Funds

Bank / Current account: A current account with fixed interest rate per annum. This also means a high liquidity.

Savings account: These accounts pay higher interests than current acounts. They are low risk and suitable for medium term saving. The difference is that you often have a lower liquidity than with current accounts.

Money market account: A deposit is a cash placement with a bank for a fixed period from overnight and up to one year at a rate of interest determined at the outset of the transaction. Interest is accrued at this rate of interest over the chosen period and paid to the depositor with the original amount on the maturity date of deposit.

The ability to deposit cash for specific periods of time offers greater flexibility in the management of both liquidity and interest rate risk. Consequently funds can be invested to match with future cash flow requirements and to 'hedge' against the impact of adverse movements in interest rates. This product is also known as a fixed rate, term or time deposit.

Bank/ Current Certificates of deposits: This Bank/ Current account: A current account with fixed interest rate per annum. This means time deposit is a financial product commonly offered to consumers by banks, fiancial institutions and credit unions. They are similar to savings accounts in that they are insured and so virtually risk-free. They are different from saving accounts in that the certificate of deposit has a specific, fixed term and, usually, a fixed intrest rate. It is intended that the certificate be held until maturity, at which time the money may be withdrawn together with the accrued intrests.

Cash Management Trusts or Funds: A Cash Management Trust is a managed investment that pools your money with the money of many other investors for investment in securities and deposits. It offers you similar flexibility to an "at-call" bank account, with a competitive rate of return.

Emma Bunting is currently working for Stadia Trustees Limited who specialise in SIPPs.