Money Market Funds: Your cash alternative
The Chancellor’s limit on cash ISAs has thrust Money Market funds into the spotlight as the legitimate way to dodge this limit.
Even before this change, Money Market funds had been having a surge in popularity. Why? Some investors are getting a bit twitchy about stock markets. Valuations are sky-high and some think this is overdone. There's talk of an AI bubble potentially bursting which could cause global stock markets to dive, and when people start worrying about their investments taking a nosedive, they look for somewhere safe to park their cash. Enter money market funds.
What are they?
A fund is a collection of financial things housed in a single product. Sometimes they buy lots of different shares, sometimes they buy other less risky things.
Money Market funds pool everyone’s money into a huge sum and then ‘invest’ this in cash-like things. So for example, they might loan some of the collective money to the UK Government. Or to whopping great big global banks. Pretty safe stuff for a known and short-term interest rate.
And this stability shows in all the graphs which have none of the ups and downs of stock market graphs. These things are slow and steady increases. Basically just like interest on a savings account.
What do Money Market funds invest in?
Short-term UK Government debt is a major component. When you lend money to the UK Government for a brief period (we're talking weeks or months, not years), you're getting about as close to a guaranteed return as you can in the investment world. The Government is not going to go pop overnight, or default on its loans, and it has a rather good track record of paying its debts!
Bank deposits are another mainstay. The fund managers spread money across deposits with various banks, essentially doing what you do with a savings account, but on an industrial scale and with better rates.
Other cash-like investments round out the mix - think commercial ‘paper’ (short-term loans made to enormous and stable companies), certificates of deposit, and similar instruments that sound complicated but boil down to lending money to stable institutions for short periods.
This short-term approach also means there's very little chance of dramatic price swings. Unlike shares, which can lose 20% of their value on a bad day, or even longer-term bonds which can wobble when interest rates change, Money Market funds aim for stability above all else.
Examples of Money Market funds in the UK
The Royal London Short Term Money Market fund has been a consistent bestseller on retail investment platforms for months and months.Over the last 12 months, it's returned around 4.6% and ‘interest’ is paid every month. Other popular options include L&G’s Cash Trust and Vanguard's Sterling Short-Term Money Market Fund. These are all reputable choices.
Are Money Market funds tax-free?
Here's where it gets better. Hold one of these funds inside a Stocks & Shares ISA and you won't pay tax on any returns. Plus, you're not locked in - you can take your money out whenever you want.
Should I invest in a Money Market fund?
Money Market funds are the boring lovechild of investing funds and savings accounts, Steady Eddy. Forget any wild swings and this is as cash-like as investing gets. But the big plus is that you can hold these in a stocks and shares ISA and so house up to £20,000 every year here from the tax man.
If you have £20,000 to save here you’ll need to pick the best platform for you. Our comparison tables will help you pick a decently priced option for one, based on the sum of money you have to invest and save. For £20,000 AJ Bell, Barclays (for banking customers) or Vanguard (if you buy Vanguard’s fund) are low-cost choices. The three Money Market funds mentioned here are from big, reliable brands and will do a good job.
Think of the platform like the shop (that’s where you set up the account) and the fund like the product on the shelves (the thing you then pop in the basket).
