How money market funds can grow your cash
Sam Benstead, fixed income lead at interactive investor, explains what money market funds are and how they work, and examines popular money market funds on the ii platform.
23rd May 2025 09:25
by Sam Benstead from interactive investor
Sam Benstead, fixed income lead, interactive investor: If you are looking to grow your cash without taking stock or bond market risk, then money market funds are a great option.
By investing in a money market fund, you are trusting a professional fund manager to generate a “cash-like” return on your behalf.
For a low fee, they put your money to work in a diversified pot of ultra-safe bonds that are about to mature, as well as in overnight deposit accounts and other short-term savings instruments offered by banks, known as money market instruments.
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Yields are normally just above the Bank of England interest rate, which can be really competitive compared with what a savings account might pay.
There are two types of money market funds: short-term money market funds and standard money market funds.
Short-term money market funds are lower risk, with stricter requirements on interest rate and credit risk, while standard money market funds can be slightly more adventurous and therefore can offer higher yields.
Because money market fund returns are so closely linked to interest rates in the UK, yields will drop if interest rates fall. On the other hand, yields also rise when interest rates rise.
This variability of returns is different to owning gilts or UK Treasury Bills directly, where you are effectively locking in a fixed return if you hold to maturity.
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Popular money market funds on the ii platform include Royal London Short Term Money Market, L&G Cash Trust, abrdn Sterling Money Market and BlackRock Cash.
While attempting to deliver a “cash-like” return, they are not the same as leaving cash in your account.
Not only can any investment fall in value, but the Bank of England has warned that there could be a rush to take money out of cash-like instruments in the event of a market crash, which may affect pricing of these assets.
Like other open-ended funds, dealing can take a couple of days, so you can’t access your cash instantly.
Interest can be automatically reinvested via accumulation fund units, or paid into your account if you own the income units.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
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