Knowing Unknown Facts of Cash Investments

At this time and age, all households will have some kind of cash investment. After all, each time someone deposits money in a bank account, he is investing in his money.

According to the Australian Securities and Investment Commission (ASIC), opening and saving money in a bank account is an investment in which the depositor is lending his money in return for payment of interest. The depositor is essentially the money lender which charges the borrower (the bank in this instance) an interest rate. It is just like a bank lending money for people to buy property, cars and other expenses. The difference is that the roles are reversed.

Often, families who invest their cash or lend their money for a longer period of time or who face more investment risk will enjoy a higher rate of interest. However, these interest-paying investments do not provide capital growth. Here are some major types of cash investments for Australian families.

All Cash Accounts

Whenever someone puts money in a cash or bank account, he is playing the role of a money lender to the bank and an investor, earning return in the form of interest payment. Cash account investments include savings accounts, online savings accounts and cash management accounts. The money lender usually has the option of taking back the loan without prior notice.

Fixed-term Deposits

Cash parked in fixed-term deposits often has to be locked away for a fixed period of time. The longer the term and the more money is invested there, the higher the interest rate will be. A penalty is charged if the money is withdrawn before the term is up.

Cash Management Trusts

These are more like managed funds, not bank accounts. They also do not have a term deposit style maturity date. Like shareholders, cash management trust investors are given a prospectus or product disclosure statement from the institution that provides the product. These trusts are useful for families trying to save for a home deposit as they generally pay high interests and come with fewer risks compared to shares.

Mortgage Offset Accounts

Mortgage offset accounts are generally safer and also more tax-effective investments. Those with a home mortgage may have an “off set account” created by the bank to hold against this mortgage. This actually helps save interest on the home loan, which can be quite substantial.

It works by having the mortgage linked to a savings account into which salary and other money can be deposited and withdrawn to pay bills and debts. As long as the money stays in the account, it is “offset” against the loan, reducing the interest that need to be paid. This means the loan term will be shortened as well. Do note, however, that mortgage offset accounts are only effective if cash sits in the account.

Cash investments subscribe to the principle of lending money in return for payment of interest. Most households already have cash investments in the form of bank accounts and fixed-term deposits. They can also invest money through cash management trusts and mortgage offset accounts.