A reader recently wrote in with the following query on how to get a better rate on cash holdings. “My stocks-and-shares individual savings account (Isa) is with [an investment platform that] stopped paying interest on cash some time ago," he says. "Are there holdings I can buy within my Isa that would pay me roughly [my former] cash Isa interest rate of 1.3 per cent, and which I could buy and sell depending on what surplus cash I have available? I appreciate I would have to pay dealing charges whenever I dealt.”
Firstly, and very importantly, higher-risk investments are not a substitute for risk-free cash. If your asset allocation, which is determined by factors such as your risk appetite and investment time horizon, requires you to have an allocation to cash, substituting it with investments would increase your risk profile. But don't allocate any more to cash than is necessary. Interest on cash is paltry (and expected to fall further) and its value will be eroded by inflation.
All investors, regardless of their risk appetite, should have about six months' expenditure in easy-access cash accounts to cover emergencies such as being made redundant or unexpected expenses.