Money market funds enjoy 300% popularity boost

These funds have become a popular choice for income hunters, as they can put their cash to work within this new higher-yield environment, all within a tax-efficient wrapper such as an ISA or SIPP.

• Assets under Administration (AUA) growth in money market funds on ii up 306% from 31 December 2021 to 31 March 2023
• Money market funds have come back into vogue in recent months, as investors can achieve better returns on their cash now that interest rates have risen

These funds have become a popular choice for income-hunters, as they can put their cash to work within this new higher-yield environment, all within a tax-efficient wrapper such as an ISA or SIPP.

In fact, since 31 December 2021, the assets held by interactive investor customers in money market funds has increased four-fold.

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

Below, interactive investor, the UK’s second largest investment platform for private investors, explores the increase in money moving into money market funds in more depth, and outlines the most popular funds with ii investors.

Back in vogue

In terms of AUA growth (i.e. money moving into money market funds), ii saw an increase of 40% between 31 December 2022 and 31 March 2023. Between 31 December 2021 and 31 March 2023, there was a 306% increase.

Higher interest rates have knock-on effects for bond yields as well as savings accounts, sending them higher, and ii has seen much greater interest in bonds and bond funds/cash equivalents over the past several months. 

In April, an actively managed money market fund, Royal London Short Term Money Market,currently yielding around 4%, made the top 10 of overall fund buys on interactive investor.

Why money market funds?

Sam Benstead, Deputy Collectives Editor,interactive investor,explains: “Money market funds are a cash-like investment that can be held inside stocks and shares ISAs, SIPPs, or general investment accounts. They usually own a diversified basket of bonds that are due to mature soon, normally within a year, meaning that investors can earn an income on their cash with less risk. They can also store cash in bank accounts to pick up a yield.  

“Investors can use them to park cash balances, but also to earn a modest income inside a tax-friendly wrapper. Rather than placing cash deposits with one bank, money market managers diversify holdings across instruments and institutions – therefore diversifying credit risk of the fund. These funds are therefore useful ‘safe’ places to hold cash – though, of course, all investing carries an element of risk – without having to move it out of an investment account and into a traditional bank.”

• The highest yielding money market funds to park your cash in

"It is important to remember, however, that the yield on money market funds will fluctuate with interest rates. If interest rates fall, then savers might have been better off with a fixed-rate savings bond as they can lock in a high yield. And, ultimately, a money market fund is still an investment, even though it is lower risk, and it could go down in value. Bond prices can fluctuate over time, and it is possible that a company may not be able to pay back its debt.”

The funds ii investors are snapping up

The top three most popular on the interactive investor platform (in both trading terms and holding terms alike) money market funds in Q1 23 were: Royal London Short Term Money Market, currently yielding 4%, Legal & General Cash Trust, yielding 3.9%, and abrdn Sterling Money Market Fund, yielding 1.22%.

Unlike both the Royal London Short Term Money Market Fund and Legal & General Cash Trust, the arbdn Sterling Money Market Fund has the majority of the portfolio held in various bank accounts rather than short-term bonds.

Dzmitry Lipski, head of funds research at interactive investor, says: “One of ii’s recent most bought funds, Royal London Short Term Money Market, stands out most to us in the sector. It has an excellent long-term track record, low drawdowns, and is competitively priced with a yearly ongoing charge of 0.10%.

“The fund seeks to maximise income by investing in high quality, short-dated cash instruments. The managers place particular emphasis on the security of the counterparties it lends to, while ensuring daily liquidity.”

“As interest rates are expected to continue rising and given the short-dated nature of the holdings in money market funds, this would soon result in an equivalent increase in the returns of the funds.”