Is it time to move on from money market funds?

Money market funds (MMF) offer returns, although never guaranteed, that are typically in line with the Bank of England base rate. They achieve this by investing in highly liquid short-term debt, such as high-quality government and corporate bonds.

By investing over a short time frame – most of the bonds will mature within a couple of months to 12 months – MMF managers are able to quickly invest in new bonds and benefit from higher yields if interest rates rise.

• Invest with ii: Money Markets| Bond Yields| Tax Rules for Bonds & Gilts

As interest rates continued to ratchet up in 2023, so did returns from MMFs; at one point they were offering yields above 5%, while in 2025 the Investment Association (IA) Short Term Money Market sector average return was 4.1% with negligible volatility. Royal London Short Term Money Mkt Y Acc was particularly popular with interactive investor customers and regularly topped our. monthly ranking of the most-bought funds. However, a series of rate cuts have seen the Bank of England base rate reduced to 3.75%, with further falls expected in 2026.

As our recently updated money market fund guide points out, the yields on money market funds are now typically below 4%. There’s typically a little bit of a lag before the fund yield rises or falls in response to interest rate changes.

“The yield on MMFs tends to track pretty close to the Bank of England base rate, but this has now fallen as UK inflation pressures have waned,” says Richard Carter, head of fixed interest research at Quilter Cheviot. “This means that future returns from these funds will be lower and may have further to fall if the Bank of England continues to lower rates.”

With the potential for MMF yields to drop below the rate of inflation (with UK inflation coming in at 3.4% in the year to December 2025), we asked fund selectors which bond funds are best suited to investors who are open to amping up the risk slightly.

• The highest-yielding money market funds to park your cash in
• Tips and tricks on how to generate a sustainable monthly income

Alex Watts, senior investment analyst at interactive investor, points out that while money market returns will fall in the event of further interest rate cuts playing out, such funds will remain highly liquid and generate returns similar to – or potentially greater than – those of cash deposits while taking a similar degree of risk.

MMFs’ potential to continue providing an attractive yield means a small allocation to the funds of around 5% makes sense, Watts says, but he suggests cautious investors could earn greater bang for their buck elsewhere.

He points to funds investing in high-quality, shorter maturity bonds with terms to maturity of one to two years, as opposed to MMFs, which typically invest in bonds set to mature in 50-60 days. Such funds typically have higher yields than those now on offer from money market funds.

Watts highlights the L&G Short Dated £ Corporate Bond Index I Acc, which invests in sterling bonds with less than five years to maturity and has a distribution yield of around 4.7%.

“The fund is passive and tracks the Markit iBoxx GBP Corporates 1-5 Index. The duration of the fund (sensitivity to interest rates) stands at around 2.5 years and the bonds within the portfolio are of high quality only – investment grade.”

Duration measures the sensitivity of individual bonds to changes in interest rates. The lower the figure, expressed in years, the less interest rate risk involved.

Sticking with passives, Carter picks out Vanguard UK Investment Grade Bond Index £ Acc fund, which is yielding slightly below 5%.

For actively managed bond funds, he picks out Vontobel TwentyFour StratInc I GBP and M&G Optimal Income GBP I Acc. Both invest in a range of different types of bonds.

For a specific play on UK government bonds (known as gilts), Carter points to Allianz Gilt Yield I Inc.

“UK gilt funds have had a tough time in recent years due to rising interest rates, but they are now offering yields of around 4.5% and would likely perform well should rates fall further.”

Nicholas Hyett, investment manager at Wealth Club, points out that while loans to governments can carry interest rate risk, because they are often paid back over decades, the credit risk – the potential for borrowers to default on payments – is virtually non-existent.

“Governments are generally pretty reliable borrowers, and countries with their own currencies can always print money to pay back debt if they have to,” he says.

Hyett recommends the Royal London Short Duration Gilts M Inc, currently offering investors a yield of 4%.

“The fund invests in loans to the UK government but aims to limit interest rate risk by only buying short-dated loans, with an average duration of 2.65 years,” he says.

• Bond Watch: four funds for different types of investors
• Sign up to our free newsletter for investment ideas, latest news and award-winning analysis

James Godrich, fund manager at JM Finn, is cautious on the outlook for government debt, so prefers to invest in short-dated government bonds directly alongside corporate bond funds.

“With political austerity an unappealing policy option for governments around the world, we have felt for some time that high levels of government debt may either force policymakers down the path of allowing sticky inflation to reduce debt compared with the size of the economy, or that bond investors could begin to react badly to uncomfortably high levels of leverage,” he says.

While JM Finn invests in a number of corporate bonds funds, Godrich says they have been particularly impressed with the process, philosophy and management of the AXA Sterling Credit Short Duration Bond Z Grs Accfund.

“The team have maintained low-risk positioning in an uncertain world but remain ready to slightly increase risk and duration as and when the opportunity arises,” he says.

“The fund has delivered strong returns with a diversified portfolio and broad sector exposure and against the current economic backdrop, the yield of around 4.4% with an average maturity of lending slightly over two years is an attractive position to be in.”

Investing in corporate bond funds means taking more credit risk than with gilts, but for investors who are comfortable with that, Quilter Cheviot’s Carter recommends Premier Miton Corporate Bond Monthly Income C acc or Royal London Sterling Credit M Acc, which are the wealth manager’s preferred UK corporate bond funds.

“However, it should be noted that all these options will be considerably more volatile than money market funds due to the combination of additional interest rate risk – duration – and credit risk,” he warns.

• Nine investment trusts to generate a £10,000 income in 2026
• 10 funds to produce a £10,000 income in 2026

Another way to help mitigate interest rate risk is to look at funds investing in floating rate loans, Wealth Club’s Hyett suggests.

“Floating rate loans don’t have a fixed rate of interest, instead the borrower pays an amount over a base interest rate – similar to a variable rate mortgage,” he explains.

“While these loans can be quite long term, the floating rate means they are essentially free of interest rate risk.”

Hyett picks the MI TwentyFour AM Monument Bond I Acc fund as an example.

“The fund invests in pools of high-quality loans and currently offers a yield of 5.3%, although this will rise and fall in line with interest rates,” he says.

“The fund only invests in investment-grade loans, and aims to be well diversified, but investors are still exposed to credit risks that don’t exist in money market funds.”