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An asset class is a group of securities that share certain similarities.

One asset class is equities, which are stocks. Another asset class is fixed-income, or bonds. And a third asset class is cash equivalents.

Cash equivalents are money market instruments. They can be U.S. government Treasury bills, which have maturity dates that are shorter than a year. Other cash equivalents are certificates of deposit, bankers’ acceptances and corporate commercial paper.

Cash equivalents are liquid, meaning they can quickly be converted to cash. They’re considered low-risk investments. Returns are practically guaranteed.

On the other hand, low risk means cash equivalents offer low interest rates and small returns compared to stocks and bonds. Their returns are frequently less than the inflation rate.

Prudent business managers will maintain enough cash to cover short-term expenses and invest the rest in opportunities that offer a higher return, rather than invest in cash equivalents. Investors should also be wary of holding too many cash equivalents in their portfolio.

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