What is a money market fund?

If you have turned to the internet to help improve your investment knowledge, you will undoubtedly have come across references to Money Market Funds.  

Money Market funds should not be confused with Money Market accounts. A money market account is a type of cash savings account offered by banks and building societies where you earn interest on your cash deposits in the same way that you would with a fixed term or notice account.  

A Money Market Fund is an investment fund and is able to invest in a range of different ‘instruments’ which are considered to be low-risk by the UK financial services regulator, the Financial Conduct Authority (FCA). These instruments can include:  

• Short term cash deposits
• Certificates of Deposit - which are a type of fixed term deposit account which investors cannot access until the maturity date  
• Commercial Paper - which is a form of unsecured short-term debt issued by a company
• Short Dated Government Bonds (Gilts)
• Short Dated High Quality Corporate Bonds  

You will often see these referred to collectively as ‘Cash-like’ instruments.  

Not all Money Market funds in the UK invest in the same way, so it is a good idea to look at the factsheet for the fund you are considering before making your investment. Or speak to a financial adviser who can provide advice on the most suitable fund or funds for you.  

How much will I pay to invest in a Money Market Fund?  

Investing in a Money Market fund is not the same as placing your money in a cash savings account as you will pay fund management charges. These are typically between 0.1% – 0.25% pa of the money you invest.  

You will also have to pay an additional charge to an investment platform to access these funds. The costs vary from platform to platform.  

Are Money Market Funds Risk Free?  

You will be exposed to investment risk, albeit at a lower level than equity risk, as there is the possibility that the issuer of the commercial paper or corporate bond may be unable to make the interest or capital payments due to the fund.  

You could also experience a loss if the return that the fund manager is able to achieve is less than the cost of running the fund and the additional charge you pay to the platform which you used to purchase your investment.  

Can I get my money back straight away if I need it?  

Although the fund manager is investing your capital in a range of instruments which are fixed term in nature, the scale of the funds and range of instruments held by the manager means that they are still able to settle redemption requests on demand.  

You should bear in mind however, that as these are investment funds there will be the usual settlement period of 3-5 days before you receive your money.    

Why do people invest in Money Market Funds?  

Attractive returns when compared to cash

As the fund manager is able to invest in a broad range of instruments the investment return can often be more attractive than the return on a traditional cash deposit account, even taking into account the charges associated with investing. Of course, this is not guaranteed to be the case.  

Access to investment markets  

Money Market funds are bought and sold on investment platforms, the same as other regulated investment funds in the UK. They are sometimes used by investors as a short term ‘safe haven’ when they are nervous about volatility in investment markets but want to be able to access investment markets quickly at a future date.  

De-risking a portfolio in preparation for retirement  

If you are working with a financial adviser, you may find that they suggest reducing some of the investment risk in your portfolio in the lead up to your retirement and recommend investing some of your money in a portfolio of Money Market funds.  

This is an effective way of protecting your pension funds from investment market volatility as you prepare for retirement and having funds available to pay your tax free lump sum and/or an income from your pension plans.

Once you have retired you will often find that Money Market funds are also used as part of a defensive strategy for managing sequencing risk, as having to sell your investment funds at the wrong time to pay out an income can have a long term negative impact on your portfolio.  

How safe are Money Market Funds?

Money Market funds are protected up to a maximum of £85,000 per person under the Financial Services Compensation Scheme (FSCS) in the same way as any other investment fund.  

If you would like to know more about Money Market funds or investments in general, please contact us for a free initial consultation to see how we can help. 

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions. 

Investment returns are not guaranteed, and you may get back less than you originally invested. Past performance is not a guide to future returns. 

The Financial Conduct Authority (FCA) does not regulate cash flow planning or tax advice.