Cash in your portfolio: how to make it work harder

Fri 01 May 2026

Kanish Chugh

PIMCO

Like all investments, holding cash has investment trade-offs to consider.

Key points

This article considers the roles that cash plays in portfolios.
The main benefits of cash include having funds when you need it and capital stability. The main limitations are inflation and interest rate risk.
Short-term fixed income, which sits between cash and fixed income, may be a consideration. It has a higher risk profile than cash.

For many investors, cash can feel like a safe harbour in an uncertain world. Knowing that part of your portfolio isn't going anywhere can be deeply reassuring, particularly when markets are volatile.

But like every investment decision, holding cash involves trade-offs. Understanding what cash does well, where it falls short and what easily accessible alternatives are available, may help make your money work harder for you.

Why investors hold cash

There are three main reasons investors hold cash in their portfolios.

1. Liquidity

This is the ability to access your money when you need it. Cash is generally the most accessible asset class, though it's worth noting that certain structures, like term deposits, can limit that flexibility if you need funds before maturity.

2. Capital stability

Unlike shares or property, cash doesn't fluctuate in value. For investors who prioritise stability, this is a meaningful attribute.

3. Optionality

Cash can provide optionality for investors during market volatility. Cash can act as 'dry powder' allowing investors to act when opportunities arise, such as investing in after-market sell‑offs or reallocating when asset prices adjust, without needing to sell other assets.

How much cash should an investor hold?

There is no universal rule – neither the Australian Securities & Investments Commission (ASIC) nor the Australian Prudential Regulation Authority (APRA) prescribes a specific cash allocation. The right amount depends on your risk profile, investment time horizon and personal goals.

That said, looking at how industry super funds approach their cash holdings may offer a helpful reference point.

According to PIMCO analysis, data from major super fund websites, including Australian Super, Aware Super and Hostplus shows that cash allocations typically range from:

3%–5% in growth-oriented options
5%–9% in balanced options
as high as 19%–45% in conservative or defensive options.

A pattern can be inferred: the more conservative or defensive your investment portfolio, the more that cash tends to feature in your portfolio.

Limitations of cash

Cash has a genuine role to play in portfolios, but it is not without risk. Here are five limitations that investors often overlook:

1. Inflation risk

Over time, inflation can eat away at the real value of your cash. If the cost of living rises faster than the interest your cash earns, you are effectively going backwards in purchasing power terms, even if your balance looks the same.

2. Interest rate risk

The income cash generates is generally not fixed. It rises and falls in line with interest rate decisions. When the Reserve Bank of Australia (RBA) cuts the cash rate, deposit rates often fall quickly, and sometimes faster than expected, reducing your income.

3. Liquidity trade-offs

Chasing a higher deposit rate often means accepting restrictions. Term deposits, for example, may lock your money away or charge fees for early access.

4. Opportunity cost

The old investing adage, time in the market beats timing the market, exists for good reason. Holding higher cash balances may result in different long-term outcomes compared to assets with higher volatility.

5. Pass-through risk

Bank deposit rates are set at the discretion of individual institutions. They can be cut quickly, inconsistently and without much notice, meaning your income from cash may not behave the way you expect.

Understanding the spectrum: cash and its neighbours

Not all cash-like options are the same, and it's worth understanding where different products sit.

Term deposits offer a fixed rate for a set period. They are predictable, but potentially inflexible.
Savings and cash accounts offer floating rates that move with the market. They are flexible, but your income moves up and down with RBA decisions.
Active short-term fixed income sits one step beyond cash. It also offers a floating-style return, but one that is actively managed across multiple income sources, potentially providing more resilient outcomes than relying on a single bank's rate.

Taking one step away from cash

For investors who want to remain defensive but are concerned about falling income, short-term fixed income may be worth considering.

Think of short-term fixed income as sitting between cash and traditional bonds on the investment spectrum, designed to provide defensive characteristics while offering the potential for a more durable income stream.

Short-term fixed income has low sensitivity to interest rate movements, meaning its value doesn't swing significantly when rates change. Income is drawn from a diversified range of high-quality, short-dated securities, rather than relying on a single bank's deposit rate.

One way in which Australian investors can access this type of strategy is through short-term fixed income exchange traded funds (ETF).

A short-term fixed income ETF invests primarily in bonds with short maturities (typically under 1–3 years). These ETFs are expected to exhibit lower volatility than longer-duration bond funds and equities. However, like all bond ETFs, they remain exposed to risks including changes in interest rates, credit quality and fluctuations in income (yield)

Take for example, the PIMCO Short Term Active Yield Active ETF (ASX:EARN). EARN invests in a diversified portfolio of investment-grade Australian and global bonds, targets monthly income distributions and offers daily liquidity [1].

As at Tuesday, 31 March 2026, EARN's yield compared favourably to the average term deposit rate across Australia's four major banks (CBA, Westpac, ANZ, NAB), based on balances over A$50,000.

Source: CBA, Westpac, ANZ, NAB as of Tuesday, 31 March 2026. On balances over A$50,000. Average term deposit (TD) rate defined as the average rate between the big four banks in Australia. PIMCO STAY Yield is represented by PIMCO’s proprietary metric 'Carry'.

As with all investments, EARN is subject to risks, including interest rate, credit and market risk, which may impact returns.

Conclusion

Cash has a genuine and important role in portfolios. But holding too much cash, or holding it too passively in term deposits or savings accounts, may quietly cost you through inflation, interest rates or missed opportunities.

Understanding how much cash is appropriate for your goals, and where the limitations lie, is the first step to making it work harder.

For investors who want to stay defensive but improve the quality and resilience of their income, short-term fixed income may be a consideration, just one step away from cash.

From ASX

The free online Bonds Course has information on the features, benefits and risks of investing in interest rate securities.

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[1] According to PIMCO analysis, as at Tuesday, 31 March 2026, EARN's yield compared favourably to the average term deposit rate across Australia's four major banks (CBA, Westpac, ANZ, NAB), based on balances over A$50,000.

About the author

Kanish Chugh, PIMCO

Kanish Chugh is head of ETF sales at PIMCO (Australia). PIMCO is a global leader in active fixed income and private alternatives investing.

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