Many investors will hold their investment portfolio entirely in cash when facing market drawdown. Sometimes it might be right, but for most this is not a sustainable choice.
When to hold cash and why
There are several reasons when you choose to hold cash in a volatile market environment. Everyone situations are different, so it is crucial to think how the situation applies to you.
For example, if your portfolio desire goal is in the near future, then holding all cash might be reasonable thing to do. The remain investment period is short, so inflation will not have enough time to impact the real value of the cash. If you are planning on investing for the long term, holding cash can be a buffer to protect your investment from market volatility. But investor will suffer opportunities cost to generate potential return. On the order hand, inflation will affect the worth of your portfolio value over time. The longer your investment horizon is, the more harmful inflation will be.
The alternative of low risk options
Before finding the alternative of low risk options instead of cash, investors should know how much cash to hold and to investment. The questions are subject to your risk tolerance. Your own situation and attitude to risk will also affect your decisions. All in all, investors should target investment returns that aim to keep pace with inflation.
Income-oriental fund is the first alternative choice for investors. It can allow a suitable dividend to pay. The income sources may come from paying stock dividends and bond coupon. But keep in mind, some income oriental investments may touch capital when paying dividend.
The second choice for investors is Multi-assets fund. The fund manager will invest across different asset classes and markets for diversification. The strategy reduces the impact of single asset classes loss, because other asset classes may perform better. Though, there are no guarantees and they can still fall overall, especially in risks contagion environment.
Money Market fund is another option
A money market fund is a mutual fund that invests solely in cash and cash equivalent securities, which are also called money market instruments. These vehicles are very liquid short-term investments with high credit quality. In rate hiking environment, short term high grade fixed income product yield will also increase, which provide opportunities fore cash management. Deposit rate, especially in Hong Kong, is still behind the curve of US rate.
Money market fund is staging a come back this year. As of September 12th, the group attracted inflows for 10 consecutive weeks, the longest stretch since early 2009. Because money market funds pay more than they have in years, people are flocking to this asset class. A money market fund has a yield around 2.1%, which increase 91% in the last 12 months.
Overall, cash is not the only option for investors’ choice. Income-oriental fund, multi asset fund and money market provide other opportunities with their different characteristic.