A financial asset class is a category of investments that share similar characteristics, including how they behave in the financial markets, the types of returns they offer, and the risks they carry.
This includes traditional examples such as stocks, bonds, commodities, and cash. Cash assets are made up of liquid financial instruments, including physical money and other assets that can easily be converted into cash. The latter may comprise money held in current and savings accounts, cash ISAs, certificates of deposit, money-market funds, and short-term government securities.
In this context, cash typically refers to money that isn’t invested in financial markets. However, certain financial instruments, such as cash funds, provide a blend of liquidity and modest returns, and so act as something of a “halfway house” between holding cash and investing.
All asset classes have unique advantages and disadvantages. Stocks, for example, can generate high returns but run the risk of losing value quite suddenly. Bonds tend to be more reliable and lower risk, but are often less flexible. And commodities can be insulated from inflation, but come with market complexities that can be challenging to navigate. Cash assets are no different. And investing in them comes with a number of pros and cons.
Here, we explore everything you need to know about this particular asset class.
Many think of cash as a necessary but unexciting part of your financial planning and something only used for minor costs or operational expenses. But cash often plays a much more strategic role.
Whether you're preparing for retirement, planning a major purchase like a home, or managing an inheritance, holding cash can offer flexibility, stability, and opportunity. By viewing cash as a financial asset in its own right, you can unlock its potential to enhance investment outcomes and contribute to a more balanced, resilient portfolio.
When markets offer unexpected opportunities — an attractive private investment, a sharp equity correction, or a distressed real estate deal — having readily available capital means you can act quickly and decisively. This flexibility has real value, and can have long-term implications for your personal and professional success.
Cash also serves as a natural shock absorber for your portfolio. It maintains its purchasing power regardless of rising rates, widening credit spreads, or increasing equity volatility.
If you consider cash as part of your broader financial strategy, and incorporate it into your investment portfolio in ways that leverage its specific characteristics and benefits, you’re likely to get the most out of it.
However, bear in mind that if you’re holding large quantities of cash in the medium or long term, there may be better ways to utilise it without sacrificing the liquidity you need. We’ll explore this more in a moment.
Let’s take a look at some of the potential advantages of having cash in hand:
On the other hand, some of the potential disadvantages of holding cash assets include:
What constitutes the optimal cash allocation for you depends on your financial goals, risk tolerance, time horizon, and current economic circumstances.
While everyone’s circumstances are different, it’s almost always worth having some cash available to you at any point in time. This exact amount will vary based on your unique situation and needs.
Generally speaking, however, when interest rates are high, cash savings can deliver solid returns. And if this cash is put to work across various accounts in a smart, nimble, and strategic way, you may enjoy even better results that positively impact the success of your portfolio.
There are, of course, other factors that may lead you to consider cash investments or alternatives. For example, when the FTSE 100 is doing well, that is generally an expensive moment to take on new investments (e.g., stocks and shares). And if government bond yields are low, that’s also worth taking into consideration when choosing the balance in your asset classes.
If there is uncertainty in the market, you may step back from the riskier investments and start balancing your portfolio with cash, which can offer much-needed stability.
In a sense, getting the most out of cash assets involves understanding that cash is an opportunity to be leveraged as a legitimate element of a healthy savings and investment portfolio.
There are several ways to manage cash, apart from conventional current and savings accounts on the high street. Below we’ll look at two of the main ones available.
Cash funds (also known as money market funds) primarily hold short-term, low-risk, and highly liquid assets such as bank deposits, certificates of deposit, and government securities. The aim is to provide you with the flexibility and liquidity of cash, while boosting the potential for modest and consistent returns.
That low risk is a clear advantage here — and if interest rates are high, cash funds will offer good returns. The short-term protection of investments is also a benefit to cash funds. However, cash funds aren’t necessarily a great long-term option due to inflation. Furthermore, while the risk tends to be low, cash funds are still an investment product, meaning value can fluctuate. The returns tend to be lower than those offered by stocks and shares, too.
Cash management platforms and savings platforms like Insignis offer a service that helps individuals and businesses to access a range of savings products offered by multiple deposit-taking institutions (i.e., banks and building societies). In this way, cash can be diversified to help balance returns and to suit your specific liquidity needs.
You can often access rates and deals that aren’t available to high street customers. And one of the biggest benefits for high-net-worth individuals and cash-rich businesses is that you can easily spread deposits across multiple institutions, optimising returns through access to a wider range of competitive rates and terms.
Furthermore, savings platforms facilitate the movement of funds at opportune moments, meaning you're positioned to be agile enough to maximise both short and long-term returns.
Insignis offers an award-winning savings platform, providing access to over 4,500 products from more than 55 banks and building societies.
We help you to secure exclusive, market-leading rates at all times, while balancing your need for liquidity with your broader investment goals. We help you diversify your risk, optimise your returns, and save time. Start your application today.
8 Devonshire Square, London EC2M 4YJ
St John’s Innovation Centre, Cowley Rd, Milton, Cambridge CB4 0WS
+44 (0)1223 200 674
