The popularity of money market funds, which are preferred by cautious investors, has recently surged
We look at how they operate and how they can increase your savings.
Investors may find it more difficult to balance risk and return due to declining interest rates and ongoing market volatility amid geopolitical tensions. As a result, many are turning to money market funds to earn a respectable return on cash while minimizing their risk exposure.
Money market funds are becoming more and more popular because they cater to investors' current reduced appetite for risk while still enabling you to invest and earn a respectable return.
Investors contributed £1.4 billion to these funds in November 2025 alone, according to the Investment Association's most recent data. In November 2024, there were only 522 million.
However, what precisely are money market funds, how do they operate, and how can you invest in them?
Money market funds: what are they?
Investments at the lower end of the risk spectrum are money market funds. You have the option to add it to your pension portfolio or keep it in your ISA. These funds, which offer marginally better returns than cash, usually hold low-risk assets like short-term debt from companies and governments. AJ Bell claims that they provided a 4.45 percent average return in 2025.
This contrasts with Moneyfacts' 2025 average easy access savings account payment of 3.5 percent.
How do money market funds function?
The goal of money market funds, which are primarily invested in cash deposits, is to outperform cash savings accounts in terms of return, though this is not assured.
Interest rate expectations play a major role in determining a money market fund's return.
The aforementioned figures show that money market funds have done well because interest rates have been high in recent years.
The Marcus by Goldman Sachs Online Savings Account, for instance, allows you to hold up to £250,000, but money market funds do not. This is in contrast to savings accounts, which occasionally have limits on the amount you can pay in.
Although experts generally advise against allocating more than 10% of your portfolio to money market funds, investors are free to allocate as much as they like. This is because, although they often outperform cash returns, they do not provide the potential returns of riskier options like stocks and funds.
According to Laith Khalaf, head of investment analysis at AJ Bell, "it's important to consider your allocation to money market funds in the context of your risk appetite and your wider holdings, including cash in the bank."
Cash and money market funds cover very similar bases, so there shouldn't be too much duplication.
"It would make sense to hold 10% in money market funds and 30% in other fixed interest funds if you already have an emergency fund saved in cash accounts and also wish to maintain a balanced investment portfolio with roughly 60% invested in equities. The "
What do money market funds put their money into?
Money market funds differ from other investments primarily because their main goal is capital preservation, or minimizing loss rather than aiming for large returns. As a result, these funds invest in cash through short-term bank deposits, and some funds mix cash with bonds that support short-term bonds issued by reputable businesses and governments.
One kind of IOU that a government or business may issue in exchange for regular interest payments is a bond.
Money market funds come in various forms, each with its own set of regulations. For instance, in order to ensure easy access to cash, a minimum of 7.5 percent of the assets must mature every day and 15 percent within a week for standard funds.
The information below demonstrates how popular short-term money market funds that hold short-term bonds are with investors.
Elite money market funds.
In recent years, money market funds have become more and more popular.
The most popular fund that Interactive Investor clients purchased each month in 2025 was the Royal London Short Term Money Market fund. The LandG Cash Trust, which was included in seven of the twelve monthly lists of the most popular money market funds in 2025, was the next most well-liked.
With five money market funds among the top ten most-bought funds list, Novemberthe month of the 2025 Autumn Budgetwas the most popular month for money market funds.
They were:
Vanguard Sterling Short Term Money Markets, Royal London Short Term Money Market, L&G Cash Trust, and Fidelity Cash abrdn Sterling Money Market Fund. Source: Interactive Investor, the top five money market funds that customers purchased in November 2025.
One of AJ Bell's ten most popular funds purchased in 2025 was the Royal London Short Term Money Market fund.
"Sterling money market funds (MMF) were popular in 2025 and proved a reasonable allocation for cautious investors," Interactive Investor senior investment analyst Alex Watts stated.
The average return for the IA Short-term MMF sector was 4.1 percent, with very little volatility. A steepening yield curve, which plots fixed-interest securities against the amount of time they have to run to maturity, contributed to the volatility experienced by investors who allocated to longer-duration bonds and funds during the first three quarters of the year. The "
Will money market funds from stocks and shares ISA allowance be blocked by HMRC?
Chancellor Rachel Reeves announced significant changes to the way ISAs operate in the November Budget.
The ISA system for people under 65 will be changed starting in April 2027, limiting the amount that can be sheltered in a cash ISA from 20,000 to 12,000.
The 20,000 annual ISA allowance will still be available, but the remaining 8,000 must be invested in a stocks and shares ISA if you want to take advantage of the remaining tax-free shelter.
According to official data from HM Revenue & Customs, 66.2% of ISA subscriptions last year were in cash, making cash ISAs by far the most popular type.
For the balance of your valuable ISA allowance, you may want to look for other options if you prefer cash.
However, since money market funds currently allow you to effectively hold cash within a stocks and shares ISA wrapper, the government is already investigating ways to prevent savers from finding loopholes.
In order to determine whether they can be held in a stocks and shares ISA or a cash ISA, cash-like investmentswhich experts believe could include money market funds and comparable investments like short-dated bondswill be put through tests under new regulations released by HMRC.
New or cautious investors may be discouraged from using these products to manage their risk while they gain confidence if the government declares that they cannot be used in an ISA for stocks and shares.
Theoretically, savers could use their full 20,000 ISA allowance by putting 12,000 in a cash ISA and the remaining 8,000 in money market funds using a stocks and shares ISA, keeping money in low-risk, cash-like investments.
Tom Selby, director of public policy at AJ Bell, stated that starting in April 2027, "every ISA investor and potential investor will need to navigate a more confusing ISA landscape."
"A much larger group of people could be impacted by measures to impose a tax charge on cash held in stocks and shares ISAs and possibly make cash-like investments ineligible for stocks and shares ISAs, even though a transfer ban is anticipated.
"The annoying thing is that, despite all of this additional complexity, there is little to no proof that reducing the cash ISA allowance will motivate more people to make long-term investments. The "
According to Selby, many savers will instead decide to invest less in cash ISAs and instead use cash alternatives like taxable savings accounts or NS&Is Premium Bonds.
"It would have made far more sense to focus ISA reforms on the needs of retail investors by simplifying the system, starting by combining cash ISAs and stocks and shares ISAs into a single main vehicle for long-term investing and short-term saving," he continued. A "
The final HMRC regulations still apply to money market funds and other near-cash assets.
Do money market funds adapt to rising prices?
Your savings are still susceptible to inflation when you invest in money market funds. This implies that there is a chance that its value will gradually decline. Over time, your money in these funds might not be enough to cover the growing cost of living.
The fact that yields on these funds are usually lower than inflation is one of the main reasons they are not thought to be appropriate for long-term savings growth.
Do other risks exist?
Money market funds are thought to be among the least risky investment options, but it's crucial to understand that there is some risk involved. It is still possible to make less money than you invested, just like with any kind of investment.
Additionally, unlike a traditional savings account, there are fees to consider. However, these fees are relatively low, at about 0.1 percent, and you may still benefit from the returns being tax-free through the ISA wrapper.
However, your money market fund investments will not be covered by consumer protection. Money market funds, in contrast to UK-regulated savings accounts, are not protected by the Financial Services Compensation Scheme (FSCS), which permits you to receive a refund of up to £85,000 in the event that the financial institution holding your savings fails.
What are the options?
You can consider short-dated fixed income (bonds) if you wish to take on a little more risk while remaining in the low-risk range. They might be an additional way to find returns that are comparable to cash without taking any risks.
IOUs include bonds, which are also referred to as fixed income or fixed income securities. When you lend money to a business or the government, you receive a fixed returnalso known as a couponin exchange. You receive your initial investment back when the bond matures at the conclusion of its term.
Savings can be held in a stocks and shares ISA and invested in a bond fund, which is a collection of bonds.
There are many different kinds of bond funds available. Government bonds are the primary focus of some, while corporate bonds issued by businesses are the focus of others. The flexibility to move around the market and choose where they perceive the greatest opportunities is greater for strategic bond funds.
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