Money market funds the worst-selling fund sector at start of tax year

Money market funds fell out of favour in April, marking a notable shift in sentiment after months of strong demand for cash-like assets, according to fund flow data from trade body the Investment Association (IA). 

Overall, money market funds saw £755 million exit in a month incorporating the start of the new tax year. This put money market funds at the bottom of the sales league table, and represented the first monthly outflow for this fund type since since August 2025.

There are two money market sectors. The biggest, Short Term Money Market, has overall assets standing at just over £53 billion. It is this sector that accounted for the outflows. The other sector,  Standard Money Markets, which has assets of £2.9 billion, posted a small inflow. 

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However, our own data doesn’t match this, and during the month of April we experienced plenty of demand for the low-risk fund type. Among our top 10 most-bought active funds for April, the accumulating and distributing share classes of Royal London Short Term Money Market ranked in first and third place, while Vanguard Sterling Short-Term Money Markets and Fidelity Cash came seventh and ninth. In our top 10 table for May, those four money market funds were still among the top 10 most-bought active funds.

The main driver behind the April outflows is that investors have become more risk-on, backed up by the fact that fund flows have posted six months of consecutive inflows. Therefore, some of the money “parked” in cash, has been put to work.

US funds were a beneficiary, with the sector attracting £932 million. Global funds, which in most cases tend to have the US as their biggest country weighting, also proved popular with inflows of £385 million.

Overall, index trackers experienced strong demand, pulling in £1.8 billion. In contrast, active funds continued to struggle, with £331 million of outflows. When solely taking into account active equity funds, the outflows were much larger, at £2.4 billion.

Miranda Seath, director, market insight and fund sectors at the IA, said: “What’s particularly striking this month is the shift out of money market funds. For much of the past year, investors have been holding capital in short-term cash-like assets, understandably so, given the level of uncertainty in markets. 

“The fact that we are now seeing that money begin to move is an encouraging sign that investors are starting to feel more confident in the investment outlook, particularly for the US following a strong month of North American equity inflows. 

“The question now is whether this momentum into North American equities broadens out, or whether geopolitical uncertainty keeps risk appetite contained.”

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Money market funds own a diversified basket of low-risk bonds that are due to mature soon, normally within just a couple of month. These funds can also put money into bank deposit accounts and take advantage of other “money market” instruments offered by financial institutions.

Returns, although never guaranteed, are typically in line with the Bank of England base rate. There’s typically a little bit of a lag before the fund yield rises or falls in response to interest rate changes.

In a nutshell, money market funds are designed to be low-risk, straightforward products that behave in a cash-like manner. Investors often use them to park cash balances for a short period while deciding where to invest, or to guard against periods of stock market volatility.

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A cloud of uncertainty overhanging money market funds at present is speculation that the government is mulling a potential tax charge of 22% on the cash held within a stocks & shares ISA. It is thought that money market funds would be included if this is implemented.

While the government is yet to confirm or deny these rumours, they haven’t come as a huge surprise. In December 2025, policymakers laid out plans to “charge on any interest paid on cash” held in investment ISAs, as part of a broader push to channel more money into the stock market to improve saver returns and stimulate the UK economy.

With the amount that under-65s can save annually into a cash ISA dropping from £20,000 to £12,000 from the 2027-28 tax year, the government wants to prevent cautious savers craving tax-free interest from circumventing the rules and maxing out their allowance by ploughing £8,000 into cash-like assets held within a stocks & shares ISA wrapper.

But big question marks hang over whether this is the right approach, with my colleague Craig Rickman outlining three key reasons why taxing cash within investment ISAs could do more harm than good.

Fund industry trade body the Investment Association (IA) categorises money market funds into two buckets: short-term and standard-term funds.

Short-term funds are lower risk. Fund managers try to ensure the highest possible level of safety by keeping very short duration bonds and high-quality bonds in the portfolio.

Standard-term money market funds generally deliver slightly higher returns by owning bonds that have slightly longer maturity dates. There are also less stringent liquidity requirements.