How to choose a money market fund

Money market funds provide a cash-like alternative to investors that can be held in a Stocks and shares ISA, while aiming to return slightly above the rate offered in cash accounts.  

Investors often use these funds instead of cash because they are highly liquid and invest in things like short-term debt and treasuries, which are typically low risk. It also means that savers don’t need to constantly be on the lookout for the best cash rates when promotional or fixed interest periods end, because the fund takes care of it for them.  

The other appeal of money market funds is liquidity. It’s typically simple to make withdrawals from a money market fund and 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.  

In addition, they can be held in a Stocks and shares ISA, while cash will face a flat-rate charge of 22% on any interest paid on cash held in this type of ISA as of April 2027, according to new regulations from HMRC. It’s important to note that staring April 2027, your Stocks and shares ISA cannot be completely invested in money market funds, it will need to hold some other investment.  

While other investments might have big fluctuations in value depending on when you take your money out, money markets are usually more stable, so you should be able to have a good idea of how much money you’ll have access to. If you invest through a cash account instead and are looking for a high interest rate, many have a fixed or notice period where you must leave your money in the account, which might not give you the flexibility you need.    

If a money market fund sounds like a good fit for you, you’ll still need to choose which fund to invest in. Here, we’ll look at the most popular money market funds among AJ Bell customers.  

You may see that some of them are labelled as short term money market funds, while others are labelled as standard. The main difference is that short-term funds have investments that mature within shorter time periods, while standard funds can have holdings that take longer to mature. This typically means that short-term funds appeal to those who may want more access to the cash while standard appeals to those are okay with more volatility in favour of the chance of slightly larger returns. But, as you can see below, the returns in the past five years have been quite similar.

Thoughts from the AJ Bell investment team  

Ryan Hughes, managing director of AJ Bell investments, identified a few key things investors can watch out for when it comes to money market funds. Even though all money market funds must follow strict rules, he says there are still differences that go beyond the fees for each fund.

“While many funds have similar yields, it is worth looking beneath the bonnet to understand how these returns are driven as it will often be the case that the higher the yield, the higher the risk the fund manager is taking with the assets. Therefore, looking at the funds weighted average maturity which represents how long they are investing for is important as is the quality of the institutions they are investing with,” Hughes says.  

You can find details about a particular fund in its Key Investor Information Document (KIID). AJ Bell’s fund screener tool is a good place to start to find the information you need.  

“The higher the quality of investments, the greater the security but also the lower the yield, so it’s a balancing act to invest in a money market fund that you are comfortable with,” Hughes says.  

“Another issue to look at is fund size as the larger the fund, the much more likely it is that the fund is highly diversified, thus reducing certain risk elements. Popular funds are often over £1bn in size meaning they can spread these assets across many investments.”

Security versus higher returns

Just like other funds, money market funds have different levels of risk, with standard money market funds holding debt and saving instruments which a longer time to mature, meaning they are more sensitive to changes in interest rates in the meantime. Some money market funds will hold debt that is unsecured. This means that if the bank, government or company they loan to goes under, you won’t have the same guarantee on that money that you would if your money was in a bank account. But remember, the assets held in a money market fund are spread out across a bunch of different banks and companies. So even if one went poorly, if the fund was well diversified, the majority of your money would still be safe.  

Others will invest in a mix of secured and unsecured assets. Secured assets mean the fund is getting something in return for the investment, like a bond. So, you have a little more collateral if something goes wrong, but you may not get as high of a rate of return.  

The Royal London Short Term Money Market fund, which is the most popular choice among AJ Bell customers, holds a mixture of secured and unsecured assets.  

“You need to be conscious of who you’re lending to, what’s the credit quality of the institution, how likely am I to get my money back?” says Craig Inches, fund manager of the Royal London Money Market fund. “You need to figure out how you can embed security and diversification into how you do that.”  

Accessing your money

The other choice you’ll need to make when purchasing a Money Market fund is how you plan to use it. Funds that are marked as income (Inc) will pay money out to investors. Depending on the fund, this could be monthly, annually or somewhere in between. If you’d rather just let the money grow, and don’t plan to access it, you can choose an accumulation fund (Acc) which will just reinvest the money for you. Often, there will be two versions of the same fund so you can choose which option you like.  

In a retirement phase, some people may be drawn to a fund that can add to their monthly income while have stability similar to cash.  

How will money markets perform in the long term?  

In money markets, the main influence on returns will be interest rates, just like in cash. The past two years have been good for money markets because interest rates have been high. But, a few years before, when interest rates were at 0%, the returns followed suit. Currently, the UK Bank Rate is 3.75% with the next decision on 30 July. Just in the past few months, rate expectations have shifted rapidly as the UK economy attempted to account for the US-Iran War. Just like any investment, it’s impossible to be sure of how they will perform in the future. But, one way to look at it may be to compare money markets to other asset classes, and see it as a puzzle piece rather than the whole picture for your portfolio.  

“It may be that we roll forward two or three years and cash may look less attractive than some other asset classes,” Inches said. “But even if interest rates come down to 3%, cash is still going to be an attractive yield-bearing asset with low volatility. So as part of a balanced portfolio, it can make a lot of sense.”