A money market fund (MMF) is an investment fund that holds short-term, low-risk assets and aims to pay a return close to short-term interest rates. People sometimes treat them as an alternative to a savings account, but they’re investments, and the differences matter.
How they work
Under the law that regulates them, money market funds invest in short-term assets and aim either to pay returns in line with money market rates or to preserve the value of the money invested. In practice that means short-term debt, such as short-term lending to governments and banks.
You buy units or shares in the fund, usually through an investment platform, a stocks and shares ISA or a pension. The fund’s income either is paid out to you (income units) or is reinvested in the fund (accumulation units). Because the fund’s assets are so short-term, its return follows short-term interest rates up and down, broadly as Bank Rate moves (how interest rates affect savings).
How they differ from a savings account
| Savings account | Money market fund | |
|---|---|---|
| What it is | A deposit with a bank | An investment in a fund |
| Protection | FSCS deposit protection up to £120,000 per person, per bank | No deposit protection; FSCS investment protection up to £85,000 if the firm fails with a shortfall, never for falls in value |
| Can it lose value? | No | Yes, though the aim is to preserve value |
| Rate | Fixed, or variable at the bank’s choice | Follows short-term market rates |
| Charges | Built into the rate | Fund charges, plus any platform charge, taken from the return |
The FSCS is clear that it can’t accept claims for poor investment performance: investment values can go down as well as up.
Tax
A money market fund usually pays its income as an interest distribution, which is taxed as interest. It counts towards your Personal Savings Allowance in the same way as savings interest, and you’re taxable on it even if you hold accumulation units, where it’s reinvested rather than paid out. Held in a stocks and shares ISA, the income isn’t taxed.
When one might suit you
A money market fund is most useful if you already invest through a platform or a stocks and shares ISA and want somewhere to keep cash inside it. For most people saving cash outside an ISA or pension, a savings account is simpler, with full FSCS protection and no charges: compare the fund’s yield, after charges, with the averages in how to find the best savings account. For amounts over the FSCS limit, see where to put a large sum.
Related guides
- Savings accounts guide: the account types, average rates, tax and protection in one place
- FSCS protection: how deposit and investment protection differ
- Where to put a large sum: splitting money across banks, and NS&I
- Stocks and shares ISAs: cash or investments inside an ISA