The backdrop is quietly shifting for cash holders, with investors globally and in Australia sitting on record levels of cash parked in bank accounts and term deposits as they wait for greater economic and market certainty.
But the return on that cash is no longer the straightforward story it once was, according to PIMCO.
Kanish Chugh, senior vice president and account manager on the global wealth management team, told Investor Daily that with the RBA on hold and the broader easing cycle still in play, the direction of travel for interest rates over time is more likely down than up, meaning the headline deposit rate available today is not guaranteed tomorrow.
“That creates a real cost in standing still: every month spent entirely in cash may mean forgoing the income that short-dated fixed income is currently offering, at some of the most attractive yields seen in years.
“Cash continues to play an important role in portfolios, but investors should periodically ask whether it is genuinely working for them or simply sitting idle out of habit, while higher-yielding, low-risk alternatives remain unexplored.”
While many Australians believe they are playing it safe by keeping their money in cash or term deposits, Chugh said there are risks they may not have considered. Cash and term deposits often feel reassuring because the value of capital does not fluctuate from day to day.
“That sense of stability is genuine, but it’s important to recognise that stability and risk-free investing are not the same thing. Some of the biggest risks associated with cash are simply less visible,” he said.
One of those risks is reinvestment, with a term deposit only locking in today’s rate until maturity. After that, investors may need to reinvest at lower rates if the interest-rate environment has changed. Rate erosion is another concern, as savings and deposit rates can decline over time as banks adjust their pricing.
Chugh also pointed to the opportunity cost of remaining exclusively in cash when short-dated, high-quality fixed income may be offering higher levels of income for only a modest increase in risk.
“Inflation is another consideration. While its impact is gradual rather than immediate, purchasing power can be eroded over time when cash returns do not keep pace with rising prices.”
None of this, however, suggests investors should eliminate cash from their portfolios.
Instead, Chugh said it highlights the importance of ensuring cash allocations remain intentional, with a clear purpose, rather than becoming a default position that may no longer align with an investor’s objectives.
Investors looking to put idle cash to work without taking on excessive risk should first ask themselves: “when am I actually going to need this money?”
If funds are needed in the near term for an emergency or a known expense, Chugh said holding cash for immediate access is often the priority. However, money that is unlikely to be required for one, three, six or 12 months or longer is often where investors may be unintentionally under-earning.
“Once you’ve established both your time horizon and the purpose of the money, the most suitable option becomes much clearer. Cash can be well suited to immediate and short-term needs, while longer-dated balances may be able to earn a higher return without taking on a significant amount of additional risk.
“From there, it’s about understanding how much risk you’re comfortable with and recognising that not all cash products or cash-like strategies are the same. The goal is to make your cash work smarter and harder for you,” he said.
There are also alternatives to traditional cash products, including actively managed fixed income ETFs.
“The starting point is that an actively managed short-term bond ETF like PIMCO’s EARN isn’t a deposit or a money market ETF; it sits a step beyond cash in exchange for a modest increase in risk … When comparing ETF options, I’d focus on four things: the credit quality of the underlying holdings, the duration or interest-rate risk, liquidity, and fees. Considering these factors will help you assess the role the fund is genuinely designed to play within your portfolio.”
