Money market funds can be a good option for savers looking to earn a return on their cash without taking on too much risk.
Sitting somewhere between a traditional savings account and a bond fund, they offer a flexible way to keep your money working while staying accessible. But how do they actually work, what do they invest in, and when might they make sense for your financial goals?
Want to know more about mutual funds? Check out our guide to mutual funds in the UK.
What is a money market fund?
Simply put, a money market fund is a type of mutual fund that invests in low-risk assets to give investors a return. They are widely considered to be safe investments and essentially offer an alternative to cash savings.
Their returns are heavily influenced by central bank interest rates, with the Bank of England’s rate at 4% at the time of writing. While savings accounts offer more rigid interest rate-based returns, money market funds offer variable returns influenced by current market conditions.
They tend to be actively managed, meaning managers select short-term assets to try to improve returns.
What do money market funds invest in?
The low-risk assets money market funds tend to invest in are:
- Cash: To maintain liquidity and meet redemptions.
- Treasury bills: Short-term government debt, considered very safe.
- Other government and municipal bonds: These are low-risk short-term debt securities.
- Corporate bonds: Usually high-grade corporate bonds that are close to maturity.
- Commercial paper: A type of short-term debt issued by corporations with high credit ratings. Offers a single payment at maturity.
- Certificates of deposit (CDs): Provide short-term fixed interest from banks.
- Repurchase agreements (repos): A type of short-term loan backed by high-quality collateral.
Why do people invest in money market funds?
Money market funds appeal to investors as they can be seen as a relatively safe space to keep cash while still earning a return. They are somewhere between a bank account and a bond fund.
Here are some scenarios in which you might want to use a money market fund:
- Emergency fund: It can be good practice to keep some kind of emergency fund so you have cash close to hand if your car breaks down, your boiler explodes, or some other unexpected expense lands in your lap. MMFs offer daily liquidity and some level of return, making them likely more attractive than leaving cash in a current account or locked up in a fixed-term savings account.
- Decision time: If you have money in your ISA, SIPP, or general investment account (GIA), but have not decided how to invest it, parking it in an MMF could be an option. This way, your idle cash continues earning a return, without locking you into a decision while you decide what to do with it. This will decrease the pressure you might feel to make an investment decision quickly, as well as any “cash drag” on your investment portfolio’s returns.
- Market volatility: You might decide to handle a spot of market volatility by parking your cash in an MMF while waiting for clear skies to emerge, allowing you to choose your next move with more certainty.
Essentially, they are appropriate solutions for situations where investors have idle cash and are not looking for long-term growth and high returns.
Pros and cons of money market funds
| Pros | Cons |
|---|---|
| Low risk: MMFs invest in cash equivalents and low-risk debt securities like treasuries and high-grade corporate bonds. | Low potential returns: Higher risk investments, like stocks and mutual funds weighted towards equities, usually have higher potential returns. |
| Diversified: While you can invest in bonds or cash equivalents yourself, MMFs also offer instant diversification. | Inflation risk: Inflation could outpace the growth achieved by your MMF investment, leaving you with a loss in real terms. |
| High liquidity: Buying and selling should not be much of an issue, making MMFs a good option if you might want to access funds quickly. | Fees: While you benefit from professional management, this does not come for free. MMFs charge fees that can diminish any returns. |
Money market fund vs cash ISA
Money market funds are often compared to cash ISAs and savings accounts, as they also offer relatively low risk but can result in higher returns.
On the other hand, a cash ISA’s fixed return is essentially a guarantee, while investors in money market funds face the risk that they may get back less than they invested.
| MMF | Cash ISA | |
|---|---|---|
| Risk level | Low | Very low |
| Returns | Variable. Generally higher than cash ISA returns. | Outlined by interest rates. May be fixed. Usually lower than MMFs, though different rates and provider promotions can change this. |
| Fees | Annual management fee (typically 0.1-0.2%) | None |
| Liquidity/access | Withdrawals usually take 1-4 business days. | Anytime for easy or instant access accounts. However, fixed-term accounts lock your money away and you may pay a penalty if you withdraw early. |
| FSCS Protection (up to £120,000 per person per institution) | No, though they may be held in an account with FSCS protection. Freetrade is covered by the FSCS.* | Yes |
| Tax treatment | Taxable as interest income unless held within an ISA or other tax-efficient account. | Tax free |
*Check the FSCS website to learn more
But the question of MMF vs cash ISA is not an either-or. They might even both have a place in your savings and investing strategy, particularly considering planned changes to the cash ISA allowance.
Cash ISA rule changes
In the November 2025 Budget, Rachel Reeves announced that a £12,000 cap on annual cash ISA allowance for investors under the age of 65 would come into place in 2027.
Cautious investors might be concerned about what to do with the remaining £8,000 of their annual ISA allowance. They might even be considering ignoring the remainder of their allowance and using savings accounts that open them up to paying tax on interest income.
Money market funds could be a great option for these investors, as they can provide similar benefits to savings accounts and can be used within tax-efficient wrappers.
That means utilising money market funds in a stocks and shares ISA could help investors to continue to utilise their full £20,000 annual ISA allowance, without having to look for higher risk investments.
We’ll have to wait to see how the final ISA rules are changed to account for this change. As of writing, HMRC has said that they plan to introduce a “cash-like” test to exclude certain assets from stocks and shares ISA eligibility in a bid to close off this potential workaround.
These changes aren’t coming in until April 2027, though, so you’ll have plenty of warning if this were to change.
For more information, read our breakdown of cash ISAs vs stocks and shares ISAs.
Money market funds on Freetrade
Freetrade users have access to a variety of different money market funds, which they can invest in through our stocks and shares ISA, Self Invested Personal Pension (SIPP) or General Investment account (GIA). You can open an account with Freetrade today to begin trading.
You can find money market funds and similar ETFs on Freetrade’s list of Cash-Like Investments.
Money market mutual funds currently on Freetrade include:
- abrdn Sterling Money Market Fund Acc / Dis
- Royal London Short-Term Money Market Fund Acc / Dis
- Vanguard Short-Term Money Market Fund Acc / Dis
As with other mutual funds, accumulation (Acc) variants reinvest income into the fund, while distributing (Dis) variants distribute income to investors.
Before making the decision to invest, consider your investing goals and always make sure to read a fund’s key investor document for full information about fees and charges.
.avif)
.avif)
.webp)
.avif)
