Money Market Funds — The Smart Cash Alternative

For much of the 2010s, money market funds were an academic curiosity for retail investors. With UK base rates at 0.25–0.5% and savings accounts offering almost nothing, the marginal difference between a money market fund and a standard current account was negligible. Both paid next to nothing.

The rate normalisation of 2022–2024 changed this picture dramatically. With UK base rates at 4.25–5.25%, Sterling money market funds were yielding 4–5% per year. Bank savings accounts — particularly for customers who had not actively shopped around — were often yielding 1–3%. The "lazy cash" problem became financially material, and money market funds moved from obscure institutional product to genuinely relevant retail tool.

This guide explains clearly what money market funds are, how they differ from bank savings, what types exist, and when they are the right choice for different investors.

What is a money market fund?

A money market fund (MMF) is a UCITS fund that invests exclusively in very short-term, very high-quality debt instruments. The typical underlying holdings include:

• UK government Treasury bills (short-dated government IOUs; typically 1–13 weeks)
• Bank deposits (short-dated deposits with highly rated banks)
• Commercial paper (short-term corporate IOUs; highly rated)
• Certificates of deposit (short-term bank-issued instruments)

The weighted average maturity of the portfolio is typically very short — often less than 60 days. This short maturity means the fund's value is barely affected by interest rate changes (very low duration risk) and that the portfolio is continuously being reinvested at current market rates.

The result: the investor receives income at close to the current overnight rate (known as SONIA — the Sterling Overnight Index Average — in the UK; or SOFR in the US dollar market), with minimal capital risk and same-day or next-day liquidity.

The critical distinction: MMFs are NOT FSCS-protected bank deposits

This is the most important point for retail investors to understand. Unlike a bank savings account — where deposits up to £85,000 are protected by the Financial Services Compensation Scheme if the bank fails — a money market fund is NOT FSCS-protected.

A money market fund is a UCITS fund, regulated by the FCA and subject to UCITS rules on diversification, credit quality, and liquidity, but it is an investment product, not a bank deposit. If the fund were to suffer a loss on its underlying holdings, investors would share in that loss proportionally.

In practice, the risk of loss on a well-run, UK-regulated money market fund investing in UK government Treasury bills and deposits with highly rated banks is very low indeed. The underlying assets are among the safest in the financial system. But "very low risk" is not "zero risk" and is not "guaranteed" in the way FSCS protection is.

For amounts under £85,000, this distinction means a FSCS-protected savings account with a competitive interest rate from a regulated bank is arguably preferable to a money market fund on a pure safety basis. For amounts above £85,000 (or above the per-institution limit for investors with multiple accounts), the MMF structure — where the underlying assets are held in segregated custodian accounts, not on the balance sheet of a single bank — may actually offer better structural protection against counterparty risk.

Types of money market funds

The UCITS and UK regulatory frameworks distinguish between several types of MMF:

Constant Net Asset Value (CNAV) — Public Debt funds: invest only in government securities (UK gilts, US Treasuries). The NAV is fixed at £1 per unit (or $1, €1); it never fluctuates. The safest and most conservative structure; the lowest yield within the MMF spectrum because the underlying assets are purest government paper.

Low Volatility NAV (LVNAV): the most common type for retail and institutional use. Invests in government securities, bank deposits, and commercial paper (all high quality). The NAV may fluctuate slightly in market stress but is designed to stay within a very tight band (±0.2%) of £1. In normal conditions, the investor's unit price stays effectively stable while income accrues daily.

Variable NAV (VNAV): the NAV fluctuates freely with market values of the underlying portfolio. More transparent but also more variable; less commonly used for retail liquidity management.

For most retail investors, an LVNAV Sterling fund is the appropriate choice — it provides higher income than a pure CNAV government fund while maintaining near-constant capital stability.

The UK money market fund universe

Accessing money market funds in the UK:

Institutional-grade funds on retail platforms: most major Sterling MMFs are "institutional" in name but accessible to retail investors via platforms including Hargreaves Lansdown, AJ Bell, and Interactive Investor, often with minimum investments as low as £1,000.

Key funds accessible to retail investors:

• Royal London Enhanced Cash Plus Fund: one of the most widely used by retail investors; invests in very short-dated sterling bonds and deposits; competitive yield; not technically a "money market fund" by regulatory definition but behaves similarly.
• Goldman Sachs Sterling Liquid Reserves Fund: institutional MMF accessible via platforms; benchmark SONIA; LVNAV.
• BlackRock Institutional Sterling Liquidity Fund: another widely accessed institutional MMF on platforms.
• Fidelity Cash Fund: available via Fidelity platform; accessible for retail investors.

Yields on these funds fluctuate daily with market rates. In mid-2026, with the Bank of England base rate at 3.75% (down from a 5.25% peak), yields are broadly in the range of 3.5–4.0% depending on the specific fund and the path of base rate cuts.

Tax treatment

Money market fund income is interest income — it is taxed at the investor's marginal savings tax rate (not dividend tax rates):

• Basic rate taxpayers: 20% on interest above the personal savings allowance (£1,000/year in 2026/27).
• Higher rate taxpayers: 40% above the allowance.
• Additional rate taxpayers: 45%; no personal savings allowance.

Inside an ISA: all income is tax-free. A money market fund held inside an ISA (as a cash-equivalent position) is tax-efficient for all investors.

Inside a SIPP pension: income grows tax-deferred. The money market fund within a SIPP serves as the "holding account" for pension contributions awaiting investment.

Outside a tax wrapper (GIA): subject to savings income tax as above. Higher and additional rate taxpayers should consider using ISA capacity before holding material cash in a GIA money market fund.

When does a money market fund make sense?

Bridge between investments: you have sold an investment and have proceeds awaiting redeployment. Holding in a current account earning next to nothing while deciding on the next investment is unnecessary. A money market fund earns close to the base rate (around 3.5–4% in mid-2026) while you decide.

The cash buffer in a drawdown portfolio ("Bucket 1"): retirees drawing income from their portfolio benefit from holding 12–24 months of planned withdrawals in a money market fund — liquid, stable, and yielding near base rate. This buffer prevents being forced to sell equities or bonds at a poor price to fund near-term income.

Short-term savings goals: money you will need in 6–24 months (a property purchase deposit, a school fees payment, a planned large expenditure). A money market fund provides better returns than most instant-access accounts with full liquidity.

Emergency fund (supplement to FSCS-protected savings): for investors with emergency funds in excess of the FSCS limit, a money market fund is a reasonable complement — understanding that it is not government-guaranteed.

When a money market fund is NOT the right choice

If the amount is under £85,000 and you prioritise absolute certainty: a FSCS-protected easy-access savings account with a competitive rate from a regulated bank (check Money Saving Expert's best buy tables regularly — the market is active) may be preferable on a pure capital safety basis.

If you need to hold it within a tax wrapper you don't have: if you have used your full ISA allowance for the year and don't have a SIPP, the tax drag on a money market fund for a higher-rate taxpayer is material. Other alternatives may be more efficient.

As a permanent long-term holding: money market funds are a parking space, not a long-term wealth-building strategy. Over 10+ years, even at 3.5–4%, cash underperforms a globally diversified equity portfolio in most historical scenarios. The money market fund serves a purpose in the portfolio architecture; it should not crowd out genuine investment.

Compliance note

This guide is for informational purposes only and does not constitute personal financial or investment advice. Money market funds are not FSCS-protected bank deposits. Investment values, while generally stable in money market funds, can fall. Yields fluctuate with market interest rates. Tax treatment depends on individual circumstances and may change. Specific funds mentioned are cited for illustrative purposes only. Always check current rates and seek qualified independent financial advice before making decisions about cash management.

How Global Investments can help

Cash and short-term liquidity management is often the overlooked dimension of portfolio construction. We help clients assess how much liquidity they genuinely need at each time horizon, where that liquidity is most efficiently held (account type, tax wrapper, institution), and how to ensure that idle cash is not eroding real returns through inflation or unnecessary tax costs. Contact us to review your overall cash and near-cash management strategy.