The main goal of cash and cash-equivalent investments is to preserve capital. Cash investments include certificates of deposit, money-market funds, treasury bills, and short-maturity commercial papers (see the section on Cash Management on this website). Cash investments offer a fixed rate of return, most checking and savings accounts are insured by the Federal Deposit Insurance Corporation (FDIC), and Treasury securities are backed by the taxing ability of the U.S. government. Short-term, interest-bearing investments include Treasury bills, U.S. savings bonds (loans to the U.S. government), and commercial paper (loans to corporations).

Some of the advantages of cash and cash equivalent investments include their liquidity and their generally stable principal. You can turn these investments into cash quickly and easily. These investments are low-risk because the borrowers have good credit and the loans are for short periods of time. They are especially good investments for money that you plan to use in less than five years or money that you plan to use for your emergency fund.

However, cash investments are less attractive options for medium-term or long-term investments (longer than five years) because they are unlikely to keep up with inflation and taxes. Use cash investments for the purpose of your emergency fund, maintaining liquidity, and some diversification, but realize that this asset class will do little to improve your portfolio’s overall performance.