Why your super needs some cash...but balance is key
The basics of investing in cash
When investing in cash assets on your behalf, we may invest in:
- cash and money market securities
- term deposits
- bank bills, and
- other short-term instruments issued by Australian and overseas governments, banks and companies.
For more details, see our Investment Guide.
In Australia, cash securities most commonly generate returns as interest linked to the official cash rate set by the Reserve Bank of Australia (RBA). The amount of interest you receive moves up and down with the RBA's official cash rate, which means returns typically increase when the RBA lifts rates, and fall when rates are lowered. Returns on cash can also be generated through small gains or losses on the value of short-term cash securities traded before maturity.
The defensive role cash plays
An investment in cash generally offers the lowest volatility and lowest long-term return relative to any other asset class. Unlike shares that at times, for example, can rapidly rise and fall, cash investments usually deliver steady, regular interest payments. This is why cash is considered a ‘defensive’ asset. It’s there to help protect your capital and provide stability, not to deliver strong long-term growth. In diversified portfolios such as our Pre-mixed options, cash serves a couple of important purposes:
It acts like a buffer during volatile times - when shares are falling, your cash holdings typically remain steady, helping to smooth the ride through market ups and downs. This stability can help you sleep better at night, particularly as you approach retirement or during periods of uncertainty.
Cash provides liquidity – an essential element of our investment governance. Super funds need some cash on hand to meet member benefit payments, fund switches, and day-to-day operations. Having readily available cash means we don't need to sell other investments at potentially unfavourable times.
The inflation trade-off and why diversification matters
There is, however, one very important consideration with investing in cash and that is inflation reduces its purchasing power over time. If cash is earning 3% interest but inflation is at 4%, you're going backwards in real terms.
That’s why holding too much of your super in cash over long periods might work against your retirement savings goals. While it may feel safe, it’s unlikely to grow enough to maintain your standard of living in retirement, particularly for younger members who have decades until retirement.
When we design our Pre-mixed options, we carefully consider the mix of growth to defensive assets that can generate long-term capital growth with the least amount of risk and deliver a smooth ride to our members.
Negative return scenarios
It's also possible that returns on cash could be negative in an environment where short-term interest rates are very low. We've seen this in recent years when, during the pandemic, the RBA held rates near zero. In this type of environment, the interest you earn on cash may not even cover the fees and costs, and taxes you pay, let alone keep pace with inflation. At CareSuper, we actively manage cash levels, adjusting them as market conditions and member needs evolve.
When holding cash may be helpful
Investing in cash can help to provide capital stability, diversification, and the ability to meet short-term financial needs. It's generally most effective when you are:
- close to retirement and seek to protect your savings from market swings
- planning to make a withdrawal soon and can't afford to see those savings decrease in value
- rebalancing your portfolio and temporarily holding funds before investing elsewhere.
Get the right advice
When you’re investing in cash, it's important to consider the entire picture. It may sound logical to take the safety of cash, but the risk is overlooking what it may cost in growth from other investments.
Understanding where cash fits in your retirement planning helps you make informed decisions about your super and gives you confidence that your retirement savings are working as they should for you.
If you’re after more information about where cash fits in your financial goals, as a CareSuper member you can access expert advice tailored to your needs. Whether you need simple help with your super or more complex advice, our team is ready to help. Call us on 1800 005 166.