Over the past two years, the investor with a cash-centred portfolio has been vindicated by the equity market upheaval. But this decision has now been brought into question by interest rates dropping almost as fast as water through a sieve.

Globally, central banks have moved towards looser monetary policy, and in September, the SA Reserve Bank reduced the repo rate by 50 basis points to 6.0%. The prime rate is now 9.5%, its lowest since 1980.

The consensus is that short-term rates will remain low for some time, given that domestic inflation is under control and economic growth will be modest. Cash-focused investors should not expect rates to change direction in the near term - if anything these investors should look at diversifying into asset classes more suited to this environment.

Investing in the fixed-interest market cannot simply be an exercise of hunting for yield. The investor needs to understand the tax implications, potential liquidity constraints and the risk (if any) of capital volatility of the instrument in question.

Cash- and money-market funds, listed property and government and corporate bonds produce interest income that is taxable.

Investors in bonds and property must appreciate that underlying capital values are market related and can fluctuate. Certain bond investments and money-market instruments may be subject to liquidity constraints depending on the term to maturity.

SA credit yields remain attractive and domestic bonds (including government bonds) should give decent returns. But there is a risk of capital loss should rates kick up again.

Tax-free dividends produced by preference shares offer an attractive alternative to property and fixed interest. Preference shares issued by the big four banks are popular. The yield ranges from 6.65%to 6.96%, depending on the issuer, with the past 12 months producing pleasing capital growth in addition to the dividend.

A number of non-banking preference shares have yielded even higher - above 8% in some cases.

But whether the investor is holding on to cash because he or she is conservative, or requires an income and relies on the interest produced, diversification should remain the key.

Buying the individual instruments as an alternative to cash, be they bonds, property funds or preference shares, must be done under proper advice. For the average retail investor, unit trusts offer a means of achieving diversification. Domestic bond, money market, and property funds, offer the client a professionally managed portfolio of these respective asset classes.

Forbes is portfolio manager with PSG Konsult. The opinions expressed are his own and do not constitute advice.