Fund Battle: which are the best money market funds?

One of the most significant investment themes of the past two years has been the rise of money market funds.

They own a diversified basket of safe bonds that are due to mature soon, normally within just a couple of months, meaning that investors can earn an income on their cash with minimal risk. They can also put money into bank deposit accounts and take advantage of other “money market” instruments.

• Invest with ii: How Bonds & Gilts work | Free Regular Investing | Open a Stocks & Shares ISA

Yields on these products shot up when interest rates began to rise towards the end of 2021, and have remained high because the Bank of England base rate has remained elevated. UK interest rates are currently 4.75%, compared with the recent peak of 5.25%. Annualised yields on money market funds are generally just above the base rate, so investors continue to pocket a safe return well ahead of the UK inflation rate of 2.6%.

• Money market funds explained
• Ask ii: ‘are bonds really low risk? My portfolio keeps dropping!’
• Bond Watch: what to do when TN25 matures next week

On our platform, assets in money market funds have risen 1,100% (a 12-fold increase) in the past two years.  

There has been one standout fund in terms of popularity: Royal London Short Term Money Market, which has been a regular feature on our monthly most-bought fund list over the past couple of years.

This fund is one of interactive investor’s Investment Pathway options for investing in drawdown when accessing all or part of a pension. The Royal London option is for those planning to take out all their money within the next five years.

Costing, just 0.1%, the yield currently sits at 4.8% (as of 31 December 2024). It measures performance against SONIA, which is the average overnight interest rate UK banks pay for unsecured transactions in sterling.

Royal London Short Term Money Market fund’s performance has been strong. Over the past five years, it has delivered a total return, net of fees, of 12.5%. That is ahead of the 12.3% return from SONIA.

Dzmitry Lipski, head of funds research at interactive investor, says: “Royal London Short Term Money Market stands out most to us in the sector. It has an excellent long-term track record, low drawdowns and is competitively priced with a yearly ongoing charge of 0.10%.

“The fund seeks to maximise income by investing in high-quality, short-dated cash instruments. The managers place particular emphasis on the security of the counterparties it lends to, while ensuring daily liquidity.”

• Fund Spotlight: earn 5% on your cash with this £7 billion fund
• Top 10 gilts: all the data you need
• Building a ‘gilt ladder’ – everything you need to know

But there are other money market funds available. Fund industry trade body the Investment Association (IA) categorises money market funds into two buckets: short-term and standard-term funds.

Short-term funds are lower risk. Fund managers try to ensure the highest possible level of safety by keeping very short duration bonds and high-quality bonds in the portfolio.

Standard money market funds generally deliver slightly higher returns by owning bonds that have slightly longer maturity dates.

Including two exchange-traded funds that the IA doesn’t categorise, we’ve identified 16 funds that aim for cash-like returns.

Here are the returns over the past six months, one year, three years, five years and 10 years (for long-standing funds).

16 funds aiming for cash-like returns

Source: FE Analytics, as 28 January 2025. Not all funds are available on the ii platform. Past performance is not a guide to future performance.

It shows that among funds with a 10-year record, Royal London is among the top performers, with a 14.76% return. Just ahead of it are abrdn Sterling Money Market, Federated Sterling Cash and Federated Short Term Sterling Prime. 

The top funds over five years are Lyxor Smart Overnight Return Ucits ETF, Federated Short-Term Sterling Prime, Premier Miton UK Money Market, abrdn Sterling Money Market and then Royal London Short Term Money Market.

While Royal London has been an excellent long-run performer, it is not the only open-ended money market fund that investors could consider.

For example, abrdn Sterling Term Money Market has marginally outperformed it over both five and 10 years, while Premier Miton UK Money Market has delivered very similar returns, including the impact of fees.

The abrdn fund’s I Class units, available on our platform, charge 0.15% and yield 4.82%, while Premier Miton yields 4.69% and costs 0.27% in fees.

Two ETFs offer instant trading

Lyxor Smart Overnight Return Ucts ETF (CSH2) and Xtrackers II GBP Overnight Rate Swap Ucits ETF (XSTR) both perform similar functions to Royal London Short Term Money Market, but do so in an exchange-traded fund (ETF) form. They are not considered money market funds by the IA, however.

• The highest-yielding money market funds to park your cash in
• Sign up to our free newsletter for investment ideas, latest news and award-winning analysis

The Lyxor strategy costs 0.1% and yields 5.05% currently. It is actively managed and tries to beat the SONIA benchmark. However, it uses derivatives rather than buying underlying assets, which makes it a more complex strategy to understand. Because it is exchange-listed, the spread between the buy/sell price of the strategy can vary and may increase during times of market stress. Income is automatically reinvested, so investors will have to sell shares in the ETF to realise a gain.

Xtrackers II GBP Overnight Rate Swap Ucits ETF (XSTR) directly tries to track the SONIA rate for an annual fee of 0.1%. It distributes income twice a year, with the current SONIA rate at 4.7%. This means lower returns than lots of rival money market funds which use active management to try and beat SONIA.

What are the advantages and disadvantages of money market funds?

The interest paid by money market funds will fluctuate with bond market yields, which are closely linked to central bank interest rates. This means it will rise when yields rise, but fall when yields fall.

As interest rates are expected to keep dropping this year and next, yields on money markets are also likely to drop. 

 Advantages of a money market fund

• Very low risk, with the portfolio likely to at least hold its value and also pay out a modest income
• Diversified, meaning investors are not exposed to a single bond failing and can withdraw their money easily
• Can be held in a tax-friendly wrapper, such as an ISA or SIPP.

Disadvantages of a money market fund

• Investments may fall in value, unlike savings accounts
• Not suitable for growing savings over the long term as yields are typically below inflation
• Sensitive to interest rate fluctuations, with lower rates leading to lower yields. Yields rise when interest rates rise
• The Bank of England warns that in times of market panic and a rush to cash, there may be liquidity issues in money market funds.