- Money market funds have become increasingly popular with advisers and clients as rates have risen
- AJ Bell last year launched its Money Market MPS providing diversified exposure to a range of money market funds
- Money market funds could be attractive for some investors in retirement where they’re holding cash as part of a drawdown strategy
Money market funds have become increasingly popular as rising rates increase the appeal of near-cash assets. AJ Bell Investments last year launched its Money Market MPS offering diversified exposure to money market funds with no additional management cost beyond the underlying funds.
AJ Bell senior research analyst, Terry McGivern, looks at some of the reasons money market funds have increased in popularity and explains how they operate:
“Money market funds, sometimes described as ‘cash funds’ may seem like a contradiction in terms – most investors will be familiar with funds that invest in a basket of equities or bonds, but investing in the money markets may not be something they’ve done before. For those clients that are attracted to the returns available on cash, money market funds can offer an appealing alternative investment option.
“Money market funds invest predominantly in short duration debt and deposits in order to generate a return similar to that of cash savings held in a bank. This includes high-quality, short-term debt like treasury bills and commercial paper.
“Rising interest rates have pushed up the cost of borrowing, meaning short duration debt, which is effectively loan notes or IOUs, now offers a higher return. Money market funds simply allow investors to invest in a diversified pool of that short term debt.
“For those who want to earn a return on cash they’re waiting to invest, and investors who need to hold some cash or cash-like assets in their portfolio – often the case for drawdown investors – money market funds have subsequently become increasingly popular.
“Generally speaking, money market funds will offer a slightly more attractive rate of return than cash accounts, with yields of around 5% available in some funds at the moment.
Flexibility for investors
“Some may wonder why investors might hold money market funds rather than using cash accounts with a bank or building society. One of the key reasons is that there is no ceiling on the amount of money you can hold – in many cases the best rates available from banks and building societies limit the amount you can deposit, whereas there is no cap on the sums you can hold in cash funds.
“Money market funds also give you the flexibility of holding money within your existing stocks and shares ISA or pension account, without the need to transfer out to a separate cash account. For advisers with clients who want to achieve a profile of returns similar to cash for a period of time, money market funds allow them to achieve this while keeping assets within existing tax wrappers.
“While there is always a degree of risk involved in any investment, money market funds have long records of stable and secure valuations, with extremely low levels of volatility. While bonds with longer to maturity are more sensitive to interest rate changes, which we witnessed when bonds prices collapsed as rates increased, short duration debt is far less sensitive to changes in rates. As a result the net asset value of money market funds tends to remain pretty constant, offering investors a relatively low risk option for their portfolio. However, this does also mean that, if and when interest rates do come down, so too will the yield on money market instruments.”
