People are pulling money out of banks at a record rate. Banks have been slow to pass on rate increases to savers – leading to an explosion of interest in other options.
One such option is Money Market Funds, which have increased in popularity by 400% over the past year.
I recently moved some cash into one for the first time. This makes me far from an expert – but I’ll share how I did it, and who it might be a useful option for. (I won’t share which one I chose, because I don’t want to risk it being taken as a recommendation.)
A MMF (which I’m told stands for something different in certain corners of the internet, but you wouldn’t know that and nor would I) is a fund that buys short-term debt, and collects the interest.
The key feature is that the debt it buys is very safe and very short-term.
For example, the Vanguard Sterling Short-Term Money Market Fund holds a mix of government bonds and debt issued by the world’s biggest companies. It only buys debt that’s due to be repaid very soon: on average, 47 days.
The idea is that over such a short time with such safe assets, they’re highly unlikely to fall in value or fail to be repaid. The upshot is that the fund should earn a return that’s close to the Bank of England’s base rate.
This is better than you can get in a no-strings-attached UK savings account – but it only beats the best savings account options by around half a percent.
So is it worth bothering with? Only, I think, in two situations.
The first situation is if you have a lot of cash. An amount where fractions of a percent make a meaningful difference. Also, with large amounts of cash you’ll want to spread it around and might run out of banks that pay an attractive rate.
A more common situation is unlocked by the fact that you can hold a MMF within a pension or other tax wrapper (ISAs in the UK). This means that if you have cash sitting around in one of these wrappers waiting to be invested, you can shift it into a MMF to earn a decent return on it. Alternatively, if you wanted to put money into a tax wrapper now (perhaps to use your allowance before the end of a tax year) but only drip-feed it into stock market investments, you could keep it in a MMF in the meantime.
It’s important to be aware that MMFs are an investment, not a savings product: they aren’t entirely risk-free. It’s possible that they could lose money if something wild happens, or that you’ll have to wait to get your money out if everyone panics at once. But as risks go, it’s as low as you can get without just parking cash in an insured bank account.
So, how do you go about investing into one? To start, I searched the investment platform I use for “money market” to see which funds were available. Then I compared:
- Distribution yield, minus fees. This is the return you’ll expect to make over 12 months, but it’s only an estimate because the interest rates on short-term debt are always changing.
- Average maturity. This is the amount of time before the underlying debt is due to be repaid. Shorter is safer, but longer often means a higher return. I wanted as short as possible.
- Type of holdings. Safety was my priority, so I looked for a big chunk of government debt (the safest) plus giant companies I’d heard of.
- Fund size and pedigree. Probably silly, but I like seeing funds that manage a lot of money and have been around for a long time.
And that’s it.