Money market funds made a bit of a comeback in 2023. In fact, two money market funds made it into the top ten best-selling ISA funds for 2023 on our platform. And three of the top 10 best-selling SIPP funds for the year were money market funds. But why are they so popular?
2023 financial headlines were dominated by inflation and interest rates. UK inflation dropped to 3.9% in November, but this figure still needs to almost halve to reach the Government-set 2% target. As a result, interest rates remained higher for longer last year. And savers looked to make the most of this 16-year high rate.1 One way they were able to do this was by investing in a money market fund.
Read and bookmark our latest update on interest rates here.
If you’re not sure what a money market fund is, it’s a fund that invests in a portfolio of short-term cash deposits, money market instruments and high-quality bonds. And it’s designed to provide a high level of stability and liquidity while also delivering a modest investment return that has the potential to exceed short-term cash deposit in a bank or building society.
Here are three reasons money market funds are popular right now.
1. They’re a good place to park cash
Many customers like to park their ISA allowances as and when they can. Some do this at the start of the tax year. While some do it towards the end to ensure they don’t miss out on making use of their tax-efficient allowance – which for 2023/2024 is £20,000.
Often investors leave this sitting as cash in their Stocks and Shares ISA or SIPP until they decide what to do with it.
And while this does earn you interest (you can find out more about how we manage your money here and the interest we offer), money market funds could offer you more.
2. They offer steady returns
The point about money market funds is that they aim to deliver a return either over and above the Bank of England’s base rate or the Sterling Overnight Index Average (which is a benchmark for short-term lending between financial institutions). Of course, this isn’t guaranteed. But given the high interest rate, it does potentially offer an attractive return for risk-averse investors. Speaking of which…
3. They are low risk
This is one of the main reasons investors look to money market funds. If you look at the online fund information, you’ll see there’s a tab for risk and rating.
