A cash investment is usually classified as: 

• A bank deposit - This is money that is placed in a bank account for safekeeping. These deposits are made to bank deposit accounts such as savings accounts, checking accounts and money market accounts. (Source: Wikipedia) 
• Money market investments - Money invested with various institutions in exchange for interest payments. 

What are the characteristics of cash? 

• Yield - It is the interest that you receive on your investments. Interest rates received on bank deposits and money market funds are quite stable and typically only change when the repo rate (as determined by the South African Reserve Bank) changes. 
• No capital growth - Your capital (initial amount invested) remains the same – but you earn interest on the capital. 
• Highly liquid - You can access these funds quite quickly, often immediately, unless they are in a notice-deposit account where a specified notice period may be required e.g., 32-day notice account. 
• Tax implications - All return is in the form of income. Tax on income is charged at the investor's marginal tax-rate - the tax rate applicable to the individual on every additional rand earned - less any allowable exemptions on income. An individual’s tax rates, and income exemptions are determined annually by the South African Revenue Service. 

Why is cash useful in an investor’s portfolio? 

• To meet short-term liquidity needs 
• It is highly accessible when needed (e.g., for emergencies) 
• As a temporary “parking-space” for surplus funds – when you haven’t decided what to do with the excess funds yet 
• When capital stability is required: your capital value does not fluctuate 

What is the risk of investing in cash? 

The primary risk of investing in cash is inflation risk. Inflation is the measure of the increase in the price of goods and services over time. If the interest rate earned on your cash investments is lower than the rate of inflation, then your wealth and purchasing power (how much your cash can buy you) decreases over time. As an asset class, cash offers the lowest real rates of return over long periods i.e., the rate of return above inflation. Thus, cash as an investment does not help you grow your wealth over the long term. So, while a cash investment may be useful for shorter time periods (up to a year, say), over long periods of time it ultimately delivers poor returns relative to inflation which may impact your spending power and standard of living in future years. 

Of course, there is also some risk that the bank you have deposited your cash with (the “counter-party”) may go into liquidation and you may not have access to your savings e.g., VBS Mutual Bank in 2018. While such occurrences are rare, it may be more prudent to consider a well-established “big-bank” with good governance and a good reputation to entrust your savings to, to minimise the risk of such an event. A money-market unit trust fund (with a reputable asset manager) helps to reduce counter-party risk by spreading your investment across a basket of savings institutions, instead of investing with just one, while still being highly accessible. 

An additional benefit of investing in a money market unit trust is that the asset manager is often able to negotiate better rates of return with big institutions because they have large sums of money to invest (the collective savings of thousands of individuals together). This benefit of having an expert manage your investment for you in a unit trust fund, does come with a cost though. This is an annual management fee payable to the asset manager and is usually expressed as an annual percentage (eg. 0.5% per annum, plus VAT), and is payable on the full amount of your investment in the fund. (eg. A fee of 0.5% on R10,000 invested for one year will result in asset management fees of R57,50 for that year, all else being equal). 

To summarise: 

• Investing in cash can be useful for short periods of time, or to have as an “emergency fund” for unforeseen expenses as it is very accessible. 
• While cash can produce a predictable stream of income and provides capital stability, it has also provided the lowest returns above inflation over long periods of time 
• If you rely solely or predominantly on cash as an investment to provide for your longer-term investment goals e.g., Saving for retirement, saving for your child’s education, etc, there is a significant risk of your spending power declining gradually over time, or not being able to maintain the same standard of living in your retirement years because your savings have not kept pace with inflation.