Low inflation and rising interest rates are turning cash into an increasingly attractive asset class, not just as a home for emergency money but also as an alternative investment to other asset types, such as shares, fixed interest securities or even property, which some experts predict is due for a fall.

According to Ian Rushbrook, the managing director of Personal Assets Investment Trust, cash is the principal asset class that exists today. Yet most people have too little of their savings in cash.

Investors who have held cash in recent years have certainly not gone very far wrong. Compared with an investment in the average All Companies unit trust which would have lost 9.08 per cent over the last five years, according to Reuters, an average cash deposit would have gained 3.5 per cent.

Over longer terms, equities are normally expected to outperform cash. But over the last ten years returns from cash have virtually matched those from shares according to the 2004 Barclays Capital Equity Gilt study which showed that the real return on cash was 3.1 per cent against 3.2 per cent on equities.

Most financial advisers agree that investors should have some money in cash but usually only an amount sufficient to provide a contingency fund for unexpected outgoings and to cover short-term spending commitments. If they are risk averse, they might want to have more in cash says Patrick Connolly, of investment advisers John Scott & Partners. But like many advisers he is worried that investors who have too much in cash may miss out on an equity market recovery.

However, a recovery in equity markets is not what Ian Rushbrook, of Personal Assets Investment Trust, is expecting in the near future. At present 34 per cent of his trust's assets are held in cash. "Cash is the asset class against which everything else should be measured at present," he says.

He agrees that cash was not the place to be in times of high inflation in the past. "In the 1970s and 1980s, investors got high negative returns from holding cash on deposit because of inflation. But that is not the case today. You can find one-year deposits paying 5.5 per cent or more, while the underlying rate of inflation is 2.5 per cent. This means you are getting a real return of 3 per cent. This is the first time for many years that you can have total preservation of capital and make a real rate of return on cash. That is why everything else has to be tested against it."

He believes there is no penalty for holding cash at present "other than the opportunity cost of missing a temporary and ill-founded equity market rise". This is because he thinks UK equities are too expensive and US equities are even more overvalued as a result of what he regards as poor monetary and interest rate policies in the United States. He is waiting for the "bubble pricing" of assets to burst before he reduces his trust's liquidity. In Rushbrook's eyes, decisions on liquidity are more fundamental to performance than stock selection because stock selection takes no account of whether the market as a whole is overvalued or undervalued.

Few other investment managers hold such large percentages of their portfolios in cash. In the case of unit trust and oeics, that is partly because there is a 10 per cent limit on the amount of cash they can hold, but it is also because many managers believe investors who choose funds expect them to be fully invested. One exception is Threadneedle UK Limited Issue Fund which can hold up to 100 per cent in cash or money market securities and has been regularly using cash this year to shelter its portfolio from market volatility.

For investors, trying to time moves between cash and equities can be a dangerous strategy. Mark Robinson, the head of investment at Berry Asset Management, says,"Various studies have shown that you only have to be out of the market for certain days over quite long periods for your returns to be punctured." He says most of his firm's clients tend to make a decision about how much they want to keep in cash before they come to the firm and they expect what they hand over to be fully invested on their behalf.

But Peter Nellist, the head of Clarke Willmott's wealth management section, believes many investors have been oversold equities and, in more recent times, bond funds, when they should have more of their portfolio in cash or similar risk-free assets. "I believe cash is an under-used asset. It is a common mistake among investors not to have enough cash and cash-type assets especially as they get older, because none of us can predict when the next investment trough will be or how long it will last."

One yardstick for how much people should have in cash, Nellist suggest, is to take your age as a guide for the percentage of your assets you should have in bonds and having it in a mixture of cash and bonds instead. He believes cash is actually preferable to bonds. "The problem with bonds is that they can go down in value just when you need your money."

Cash investors must naturally keep a close eye on interest rates to make sure their returns are ahead of inflation. Fortunately, there is plenty of competition between deposit takers and websites such as moneyfacts to highlight the "best buy" cash accounts.

Alternatively, Mr Nellist recommends investors use Index Linked National Savings certificates so they know their savings are protected against inflation as well as getting a real return. "Index linked certificates are as good as cash and safer than houses and with the Government standing behind National Savings, it means savers don't have to worry about what might happen if their deposit taker goes belly up either."