CASH

Cash is an important asset class. The appeal of cash is that, inflation aside, it is risk-free. Regardless of what happens to the stock market or house prices, your cash is safe. Therefore, whatever else you invest in, holding money in cash for a rainy day will always be a sensible move. Around three months' salary should be held in an instant-access cash account for use in an emergency. It must however be borne in mind that cash is purely an interest-earning investment and provides no capital growth.

Cash investments include Term Deposits / Fixed Deposits, Money Market Funds / Liquid Funds, and Gilts & Bonds.

TERM DEPOSITS

These are also called fixed deposits. You lend your money to a bank for a fixed period of time at a fixed interest rate - say six months or two years - after which the bank returns your money to you with interest.

You may wish to hold more than this sum in today's choppy financial climate and if you are prepared to tie-up your money for a period of, say, a year, you can benefit from some decent returns from fixed-rate savings accounts, fixed deposits & company deposits. For longer terms, bonds may be considered, etc.

MONEY MARKET FUNDS / LIQUID FUNDS

These are investments either in a bank account or a unit trust fund / mutual fund (offered by unit trust companies / mutual fund companies) in which your money is pooled with that of other small investors and lent to big institutions or invested in gilts and other Government Securities. This way you get a higher interest rate.

These investments offer a high annualized yield while offering near-complete liquidity. Whenever an investor needs cash, he applies for a redemption and the funds are available to him in his bank account within a couple of days. Returns are relatively risk free.

GILTS AND BONDS

A bond is simply a loan, made by you, to the government or a company. In return for helping them to raise funds, you get a steady stream of income. Bonds can be useful for investors who want to steer clear of the vagaries of the stock market, but who want the certainty of fixed-interest payments.

A bond is effectively a loan. There are various types to choose from. The safest is gilts - these are essentially loans to the government in exchange for a firm promise of repayment of the face value and a set rate of interest, or yield, for the life of the bond. This period is between one and 50 years.

Gilts cannot be cashed in before their official maturity date but you can sell them on. As with shares, the price you can get can change from day-to-day and you should be aware that you may not be able to sell your gilt holding for the same price that you paid.

While it is possible to invest directly in individual gilts and other fixed-interest bonds, it is wiser for most investors to do so through a fund - and there is a broad range to choose from. These funds tend to be attractive when interest rates are set to fall.

Gilt yields and gilt prices have an inverse relationship. When gilt yields fall in line with interest rates, prices on existing gilts go up - so their value increases for investors.

For the cautious, gilts can also offer a safe haven when stock market conditions are choppy and the economy is slowing down.

Bonds issued by companies are known as corporate bonds. These pay out a fixed interest rate and usually have a life of seven to 10 years. These work in the same way as gilts, so the bond may be sold on the market, or the interest taken until you redeem the bond for the original purchase price. But as these are issued by a company, you take the risk of it staying in business and making money while you hold the bond.

Two international agencies, Moody's and Standard & Poor's, specialise in grading the quality of corporate bonds. They award ratings based on ability to pay interest and the likelihood of the capital debt being repaid on maturity. The best rating is Aaa or AAA. The lower a bond's credit rating, the higher the risk and the more return you can expect.

The three big attractions of cash investments are:

* Your capital is usually guaranteed;

* Your rate of interest is often guaranteed; and

* You can get access to your money fairly quickly, particularly if it is in a money market account.

The main disadvantage of cash investments is that they seldom keep up with inflation, particularly after tax return is taken into account.