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Asset Classes


Introduction to the cash and fixed interest investment asset class

Relative to property and share investments, cash and fixed interest investments are a lower risk investment which offer potentially lower returns over the longer term. In return for lending your money to an organisation, you're able to earn interest. Cash investments are usually on call, while fixed interest investments are usually for a set period of time.

Investing in cash and fixed interest investments is most useful for producing a regular income and protecting your capital base. You should invest in cash and fixed interest investments when you may need to call on your money in the near future, defined conservatively as the period within the next three years.

the Shape of Money recommends that, depending on your personal situation and portfolio requirements, you should have at least some of your funds in both cash and fixed interest investments.

Cash investments

Cash investments are best suited for the funds you may need immediately, for your rainy day or emergency fund. The following comments apply, whether or not the investment is made directly, or through a managed fund.

Cash investments may have a lower rate of return than fixed interest investments, but they offer easier access to your funds. Always check the way in which interest is calculated: examine whether it's calculated on the average or minimum balance, and whether the interest is credited daily, monthly or annually.

Characteristics of cash investments:

  • Your money will be on call, though it doesn't necessarily have to be called an on-call account,
  • There shouldn't be any entry or exit fees,
  • You should be able to compound your interest, and
  • You shouldn't be penalised for making a withdrawal.

Cash investments can be made directly, or indirectly through unit trusts.

Fixed interest investments

The term Fixed Interest Investments covers a broad range of investment options, ranging from a local bank's term deposit, through to government and corporate bonds.

These investments are for a fixed period of time, in which you lend the institution funds and they agree to pay back that sum (or principal) at the end of the term (or maturity date). They also agree to pay you interest (or coupon payment) at regular intervals.

The range of fixed interest investment options includes term deposits, kiwi bonds, debentures, corporate and government bonds.

It's important to note that the value of investments in tradable bonds is influenced daily by interest rate movements. This point applies equally to both direct and managed fund investments.

Fixed interest investments can be made directly, or indirectly through unit trusts.

Other income investments

Investments in mortgage trusts share the advantages of other cash and fixed interest investments, namely regular income and lower risk. It's particularly important to realise that mortgage trusts are, however, relatively less liquid.

These investments are made through unit trusts and gifs.

Additional information and resources

There are a number of useful books in our Other Resources section you could consider buying or borrowing. Most of these include information on investing in Cash and Fixed Interest Investments.

In addition, try magazines such as the NZ Investor Monthly, and financial newspapers such as the National Business Review and The Independent.