Understanding Money Market Funds: A Comprehensive Guide
As market instability persists amid geopolitical concerns and declining interest rates, many investors are seeking safer alternatives for their cash. A popular choice is money market funds, which provide a means to generate reasonable returns while minimizing risk exposure. Recent statistics from the Investment Association highlight a growing trend: investors allocated £1.4 billion to these funds in November 2025, a significant increase from £522 million in the same month the previous year.
Understanding Money Market Funds
Money market funds are designed as low-risk investments. They allow investors to hold them within various accounts, such as ISAs or pension portfolios. These funds primarily invest in secure assets, including short-term government and corporate debt, often yielding better returns compared to traditional cash savings.
Performance and Returns
According to AJ Bell, money market funds offered an average return of 4.45% in 2025, surpassing the 3.5% from easy access savings accounts, as reported by Moneyfacts. While the returns on money market funds are not guaranteed, they generally reflect prevailing interest rates, which have been favorable for these funds recently.
Investment Mechanics
- Money market funds invest chiefly in cash deposits and short-term debt instruments.
- They are open to varying amounts of investment, unlike traditional savings accounts that may impose limits.
- Experts recommend keeping allocations to these funds at around 10% of an investment portfolio to maintain balance and avoid excessive overlap with cash savings.
Types of Investments
The main goal of money market funds is capital preservation. These funds invest in short-term cash deposits and bonds issued by high-quality companies and governments. There are specific regulatory requirements, such as maintaining at least 7.5% of assets maturing daily, ensuring liquidity for investors.
Trending Money Market Funds
Recent trends indicate increased demand for certain money market funds. The Royal London Short Term Money Market fund topped the list of most purchased funds in 2025, along with the L&G Cash Trust, both featured frequently in investor selections throughout the year. Other notable funds include:
- Vanguard Sterling Short Term Money Markets
- Fidelity Cash
- abrdn Sterling Money Market Fund
November 2025 was particularly notable, coinciding with the Autumn Budget, during which five money market funds ranked among the top ten most-bought funds.
Future Regulations and Risks
Significant changes may be on the horizon for money market funds, especially regarding their treatment within ISAs. Starting in April 2027, proposed reforms could limit how much can be sheltered in cash ISAs, potentially affecting investment strategies for many cautious investors. The chancellor has warned against exploiting loopholes that allow money market funds to function within stocks and shares ISAs.
Despite their low-risk nature, money market funds are not entirely risk-free. Investors must be aware that while these funds can provide better returns than cash, they are still prone to inflationary pressures, which may erode savings over time. Additionally, these funds lack the protections offered by the Financial Services Compensation Scheme (FSCS) available for traditional savings accounts.
Alternatives to Money Market Funds
For those willing to assume slightly more risk, short-dated fixed-income investments can provide alternatives to money market funds. Bonds, or fixed-income securities, are opportunities to earn fixed returns by lending to companies or governments. Various bond fund types exist, catering to different risk appetites and investment strategies, and can also be included in stocks and shares ISAs.
As the investing landscape evolves, understanding money market funds and their implications in portfolios will remain crucial for many investors navigating market uncertainties.
