- Money market funds are low-risk investments holding short-term debt from governments and companies, offering slightly better returns than cash
- Money market funds invest in high-quality, low-risk assets like government and company bonds, certificates of deposit, and sometimes cash
- You can hold money market funds in various accounts like a Stocks and shares ISA, SIPP, or Dealing account
- Returns depend on interest rates, with recent high rates leading to good performance, but there are risks like bond issuers defaulting
What is a money market fund?
A money market fund is a lower-risk investment vehicle that holds short-term debt issued by governments and companies. These funds aim to create a slightly better return than you’d get on cash in the bank.
Money market funds act as an alternative to cash. They can be held in a wrapper like a Stocks and shares ISA, Self-invested personal pension (SIPP) or a Dealing account.
How do money market funds work?
Money market funds contain a portfolio of higher-quality, low-risk investments such as bonds issued by governments or companies that mature within 12 months, some as short as two to three months.
They also invest in certificates of deposits – a type of savings account that pays a fixed rate on money over a set period. Funds can also invest directly in cash.
Why invest in a money market fund?
Money market funds have historically provided a slightly better return than cash, which can give a boost to your savings.
Cash accounts often have restrictions on how much money you can deposit, but money market funds don’t have these limits.
Money market funds also offer convenience. Opting for a money market fund over cash can allow you to keep all your investments within a single wrapper. For example, if you hold share or bond investments and a money market fund, you could hold all these assets in a Stocks and shares ISA instead of needing to manage both a Cash ISA and a Stocks and shares ISA.
Need help finding a money market fund?
Use our fund screener tool to find and compare thousands of funds, using our advanced filtering system. Narrow down your search by filtering ‘Asset class’ by ‘Money market’ and browse our full selection of money market funds on offer.
What are the returns on money market funds?
The return on a money market fund is heavily influenced by interest rate expectations.
In the past few years, interest rates have been high, so money market funds have performed well. In 2024, they offered an average return of 5.25%, according to research by AJ Bell.
When interest rates are low, the returns of money market funds will reflect this situation, just like a cash savings account would.
Read more about how you can consider market volatility when investing.
Risks of money market funds
Money market funds are relatively low-risk investments.
The key risk to consider is the issuer of a bond inside the fund portfolio defaulting on its payment obligations. As money market funds only invest in bonds with a short time until maturity, the fund manager should have a good idea of default risks. They will typically avoid bonds that are higher risk.
That doesn’t mean bonds inside a money market fund are risk-free, as there are no guarantees that bond issuers won’t default.
Learn more about managing investing risk.
Is my money locked away with money market funds?
As with any investment, there are pros and cons to money market funds. If you are using a money market fund in the same way you would use cash savings, be aware of the time it takes to withdraw money.
It can take three to four working days from selling a fund to receiving the proceeds in your AJ Bell investment account. It then takes one to three working days to transfer cash to your registered bank account. That is in line with other types of funds.
This process can still be quicker than taking money out of certain cash savings accounts which lock your money away for a long time or have 30-day notice periods.
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Disclaimer: These articles are for information purposes only and are not a personal recommendation or advice. The value of your investments can go down as well as up and you may get back less than you originally invested. Past performance is not a guide to future performance and some investments need to be held for the long term.