When cash is the riskiest asset
The BBC is reporting this morning that a Bank in India has allowed termites to eat through millions of rupees worth of banknotes.
Customers at the bank are believed to have lost around £137,000 of their cash deposits.
This is not the first time an incident like this has taken place at an Indian Bank; in 2008 a trader lost his life savings when termites ate through the banknotes he kept stored at his bank.
Termites eating your cash is not a risk that most savers would consider, unless perhaps they keep their cash at home under a mattress rather than safely held within a bank.
Instead, savers tend to be concerned with some other important risks.
Cash is typically subject to inflation, shortfall, corporate and interest or income risks.
Over time, the purchasing power of cash is typically eroded by the rising cost of goods and services. A termite attack could make a sustained period of high inflation look like a good outcome for savers.
Keeping your money in cash can result in shortfall risk, which is the risk of failing to achieve your financial objectives. Over time, cash typically produces the lowest returns of any major asset class. This is the result of the relative security of cash compared to, say, company shares.
Corporate risk is the danger than the bank or building society looking after your cash savings will get into financial difficulties and be unable to meet their obligations. In the UK, savers are protected by the Financial Services Compensation Scheme (FSCS) which mitigates this risk, up to a maximum limit of £85,000 per saver per institution.
Income risk refers to the problems caused when interest rates fall and savers have been relying on interest to provide income. This risk has been particularly problematic for elderly savers over the past couple of years as this group of savers tend to rely on their savings for interest income.
Cash is often described as a ‘safe’ asset, but it is not without its risks.
Whilst the probability of a termite eating through your bank savings here in the UK is pretty low, there are other important risks for cash savers to carefully consider.
Photo credit: Flickr/williamcho