What is a Cash Equivalent?
Buying Cash equivalents (or Money Market Instruments) means you are lending money short-term, mostly for the duration of one year or less, and getting a bit of interest. The most common examples are GIC (Guaranteed Investment Certificates) or Money Market funds. The market that deals with this kind of short-term lending is called Money Market, so, at times, these products are called Money Market Instruments.
Why Invest in Cash Equivalents?
Compared to stocks, cash equivalents are less risky. Compared to bonds, they are locked in for only a short term. Cash equivalents do earn interest so this investment option is still better than leaving your cash under your mattress. Most investors keep this asset type for emergency funds, big purchase plans or investment opportunities that could arise in the short-term. However, cash equivalents offer very little return if the interest rate is low.
How to Purchase Cash Equivalents?
Most banks and credit unions offer various short-term cash equivalents. Mutual funds that contains a variety of cash equivalents are called money market funds. Other diversified mutual funds also include cash equivalents such as commercial paper or treasury bills as their cash asset.