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Introducing low-risk ETFs that track short-term interest rates, like the US fed funds rate.
Money market funds are low-risk investments that aim to protect your money while earning income from current interest rates.
Unlike many other funds that invest in stocks, money market funds opt for safer options like short-term government bonds, treasury bills, or certificates of deposit.
That’s why they’re often considered a good low-risk investment for any extra cash in your investment account.
While you might be tempted to keep a part of your portfolio as cash, that cash can end up being a drag on your performance. That risk is even greater during periods of high inflation, where the purchasing power of your uninvested cash will fall.
Money market funds can be a good choice if you want to counteract the potential of cash pulling down your overall returns. They might be a good place to park your cash held in an ISA or SIPP, because they can offer you a safer and more liquid investment as you wait for an opportunity to put that cash into the market.
Remember though, investing in a money market fund isn’t the same as putting your cash into a savings account. Money market funds are an investment, so as is the case with all investments, there’s no guarantee the fund’s value will go up. You may get back less than you invest, which wouldn’t occur in a savings account. And despite their low-risk strategy, money market funds can still be volatile during periods of market stress.
A few last bits to bear in mind are that MMFs are ETFs, so there will be a spread between the price at which you can buy and sell. A wider spread can make it more difficult to buy or sell an MMF at your desired price. Some of these ETFs trade on the LSE but are listed in US Dollars, meaning that you’ll have to pay foreign exchange fees. They also all charge a management fee, so make sure you check out the Key Information Document (KID) before making an investment.
All that said, money market funds are a low-risk investment which might have a place in your portfolio. They’re a safer and more conservative choice for investors who want to have easy access to their money. They could also be a good alternative to keeping cash in a regular bank account because they can provide slightly higher returns. Though, with the possibility of a greater gain will come a higher risk than simply depositing your cash in a savings account. Before deciding to invest in a money market fund, be sure to consider your financial goals, risk appetite, and whether these investments are suitable for you.
When you invest, your capital is at risk. The value of your portfolio can go down as well as up and you may get back less than you invest. Freetrade does not give investment advice and you are responsible for making your own investment decisions. If you are unsure about what is right for you, you should seek independent advice.
ISA and SIPP eligibility and tax rules apply.
Past performance is not a reliable indicator of future returns.
The views expressed above are those of community members and do not reflect the views of Freetrade. It is not investment advice and we always encourage you to do your own research.