Cash has had a better run in recent years. But with the path of interest rates still uncertain, and ISA rules changing from April 2027, savers are keeping a closer eye on where their money sits.
For some people, a Cash ISA or savings account will still be the right fit. Others may want a cash-like option inside an investment account, such as a Stocks and Shares ISA or SIPP. That’s where money market funds – also known as cash funds – can come in.
Here’s what you need to know.
What is a money market fund?
A money market fund is a type of investment fund. It’s designed to sit at the lower end of the risk scale.
Like other funds, it pools your money with money from other investors. A fund manager then invests that money in short-term, cash-like assets.
These can include:
- Government debt
- Treasury bills
- Certificates of deposit
- Short-term bonds
- Cash and cash-like investments
In simple terms, the fund lends money to governments, banks and companies for short periods. In return, they pay interest. That interest is returned to investors in the fund.
Is a money market fund the same as cash?
No. And this is a really important point.
A Cash ISA or savings account is a cash product. You usually know the interest rate. And – most importantly – your money is not invested in the stock market.
A money market fund is different. It may hold cash and cash-like assets, but your money is invested.
Access is different too. Some savings accounts give you instant access. Others lock your money away for a set time.
With a money market fund, you need to sell your investment before you can get the money. This normally takes a few days. It can take up to seven working days, depending on the fund and the provider.
Why do people use money market funds?
Money market funds can play a few roles.
Some investors use them as a lower-risk part of a portfolio. Others use them as a temporary home for money while they decide where to invest next.
They can also be useful inside a Stocks and Shares ISA or SIPP. This may appeal to people who want to hold some cash-like investments without moving money out of their investment account.
There’s a range of cash and money market funds available on our platform. When you’re ready to start comparing funds, our cash and money market funds page shows some of the options available through Fidelity and points you towards our latest range.
How are they different from Cash ISAs?
A Cash ISA is a savings account held inside an ISA. Any interest you earn is free from UK income tax.
A money market fund is an investment. It can be held in a Stocks and Shares ISA, SIPP or Investment Account, depending on what is available.
A Cash ISA may suit people who want certainty, easy access and a known interest rate.
A money market fund may suit people who want a cash-like investment return and are happy to take a little more risk.
Put simply, cash is secure. Money market funds are for people who want something cash-like but understand it’s still an investment.
Find out more about Cash ISAs and cash funds in our guide, Cash ISA versus cash funds: the basics. It explains the key differences and can help you consider which option may suit you.
What are the risks?
Money market funds are fairly low risk. But they’re not risk-free. This is because:
- The value can fall
- Returns are not guaranteed
- The yield (or income the funds pays) can fall when interest rates fall
- Inflation can reduce the real value of your money over time
- The fund could be affected if a bank, company or government it lends to gets into trouble
Before you invest, read the fund factsheet and key information document. Check what the fund invests in, what it costs, how risky it is and how quickly you can access your money.
What do ISA reforms mean for money market funds?
ISA rules are due to change from 6 April 2027.
The government has announced that the annual Cash ISA allowance for people under 65 will fall to £12,000. The allowance for savers aged 65 and over will remain at £20,000, meaning they won’t be affected by the reforms. The overall ISA allowance will also stay at £20,000.
The lower Cash ISA limit will only apply to new contributions. Any money already held in a Cash ISA will still be sheltered from tax.
Investment ISAs are changing too. The government plans to introduce a 22% charge on any interest paid on uninvested cash held within a Stocks and Shares ISA or Innovative Finance ISA. The aim is to stop people using investment ISAs to store large amounts of cash tax-free for long periods.
Rules around money market funds are also shifting. The government has confirmed that investors can hold money market funds in investment ISAs and enjoy tax-free returns. However, money market funds cannot represent 100% of your portfolio. If they do, they’ll be classed as “non-qualifying investments”. This means they would no longer meet the rules for being held in that ISA.
Are money market funds right for me?
That depends on what you want the money for.
A money market fund could be useful if you want a lower-risk investment. It could also work if you want to hold money somewhere while you decide where to invest next.
But if you need instant access to your money, want a guaranteed return or cannot accept any fall in value, it may not be for you.
It’s also unlikely to be the best option for long-term growth. If you’re investing for five years or more, you might like to think about other types of investments, like shares, bonds or multi-asset funds.
The upshot? Money market funds are ‘cash-like’, but not cash
Money market funds, or cash funds, can be useful for cautious investors.
They aim to offer a cash-like return from short-term, lower-risk assets. They can be held in a Stocks and Shares ISA, SIPP and even an Investment Account. They can also help keep part of a portfolio steady.
But they’re not cash. They are investments.
So before choosing one, think about your goal, your timeframe, how soon you may need the money and how much risk you are willing to take.
For more information on cash and money market funds click here.