What are money market funds?

With falling interest rates and continued market volatility amid geopolitical tensions, investors may find it harder to balance risk and return – forcing many to turn to money market funds to earn a decent return on cash and while keeping their risk exposure to a minimum.

Money market funds have been growing in popularity as they feed into the lower risk appetite investors currently have yet allow you to earn a reasonable return while still investing.

The latest figures from the Investment Association show investors pumped £1.4 billion into these funds during November 2025 alone. This compares to just £522 million in November 2024.

But what exactly are money market funds, how do they work and how can you get exposure to them?

What are money market funds?

Money market funds are investments which fall at the lower end of the risk scale. You can hold it as part of your ISA or add it to your pension portfolio. These funds typically hold low-risk assets such as short-term debt from governments and businesses, offering slightly better returns than cash. According to AJ Bell, they offered an average return of 4.45% in 2025.

This compares to the average easy access savings account in 2025 which paid 3.5%, according to Moneyfacts.

How do money market funds work?

Money market funds are mostly invested in cash deposits and aim to give a higher return than a cash savings account, though, unlike a savings account, this is not guaranteed.

The return on a money market fund is heavily led by interest rate expectations.

Interest rates have been high in recent years which means money market funds have performed well, as the figures above have illustrated.

Unlike savings accounts which sometimes come with restrictions on the amount of money you can pay in – for example, you can hold a maximum of £250,000 in the Marcus by Goldman Sachs Online Savings Account – money market funds don’t impose such limits.

Investors can place as much as they like in money market funds, though experts generally suggest you don’t have more than 10% of your portfolio in these funds. That’s because while they tend to beat returns on cash, they don’t offer the potential returns of riskier options, such as stocks and funds.

“It’s important to consider your allocation to money market funds in the context of your risk appetite and your wider holdings, including cash in the bank,” said Laith Khalaf, head of investment analysis at AJ Bell.

“Money market funds and cash are covering very similar bases, so you don’t want too much duplication.

“If you already have an emergency fund saved in cash accounts and in addition want to run a balanced investment portfolio with broadly 60% invested in equities, it would be reasonable to hold 10% in money market funds and 30% in other fixed interest funds.”

What do money market funds invest in?

Money market funds are different from other investments, mainly because their primary objective is preservation of capital – in other words, to minimise loss rather than aim for huge returns. As such, these funds invest in cash via short-term cash deposits with banks and some funds combine cash with bonds – backing short-term bonds issued by governments and high-quality companies.

Bonds are a type of IOU issued by a government or company in return for paying regular interest payments.

There are different types of money market funds with differing rules that apply to them. For example, there’s a requirement to have a minimum of 7.5% of the assets maturing daily and 15% within a week for standard funds, ensuring easy cash access.

Short-term money market funds – that hold short-term bonds – are very popular with investors as the data below shows.

Top money market funds

Money market funds have been growing in popularity in recent years.

During 2025, the Royal London Short Term Money Market fund was the number one most-bought fund every month during 2025 by Interactive Investor clients. The next most popular money market fund was the L&G Cash Trust – which featured in seven of the 12 monthly most-bought funds lists across 2025.

November – the month of the 2025 Autumn Budget – was the most popular month for money market funds, with five money market funds in the top 10 most-bought funds list.

They were:

1. Royal London Short Term Money Market
2. L&G Cash Trust
3. Vanguard Sterling Short Term Money Markets
4. Fidelity Cash
5. abrdn Sterling Money Market Fund.

Source: Interactive Investor, top five money market funds bought by clients in November 2025

The Royal London Short Term Money Market fund also featured in AJ Bell’s 10 most popular funds bought in 2025.

“Sterling money market funds (MMF) were popular in 2025 and proved a reasonable allocation for cautious investors,” said Alex Watts, senior investment analyst at Interactive Investor.

“The IA Short-term MMF sector average return was 4.1% with negligible volatility. Those investors who allocated to longer-duration bonds/funds experienced volatility owing partly to a steepening yield curve (where fixed-interest securities are plotted against the length of time they have to run to maturity) during the first three quarters of the year.”

Will HMRC block money market funds from stocks and shares ISA allowance?

In November’s Budget, chancellor Rachel Reeves announced some important reforms to how ISAs work.

From April 2027, the ISA system will be reformed for under 65s so that a maximum of £12,000 can be sheltered in a cash ISA, down from £20,000.

The annual ISA allowance of £20,000 will remain, but should you wish to utilise the rest of this valuable tax-free shelter, the remaining £8,000 must be invested in a stocks and shares ISA.

Cash ISAs are by far the most popular type with official data from HM Revenue & Customs revealing that 66.2% of ISA subscriptions last year were into cash.

If cash is where you want your money, you might want to find alternatives for the remainder of your precious ISA allowance.

But the government is already looking at ways to block savers from finding loopholes, as currently, money market funds enable you to effectively hold cash within a stocks and shares ISA wrapper.

Under new rules published by HMRC, ‘cash-like’ investments – which experts believe could include money market funds and similar investments like short-dated bonds – will be subject to tests to establish whether they are eligible to be held in a stocks and shares ISA or a cash ISA.

If the government says they cannot be used in a stocks and shares ISA, it could stop new or cautious investors from using these products to manage their risk while they build confidence.

If there’s no change, savers could – in theory – place £12,000 in a cash ISA and put the remaining £8,000 into money market funds using a stocks and shares ISA – utilising their entire £20,000 ISA allowance but keeping money in low-risk, cash-like investments.

“Every ISA investor and potential investor will need to navigate a more confusing ISA landscape from April 2027,” said Tom Selby, director of public policy at AJ Bell.

“While an expected ban on transfers, measures to impose a tax charge on cash held in stocks and shares ISAs and potentially making ‘cash-like’ investments ineligible for stocks and shares ISAs could hit a far wider group of people.

“The frustrating part is that, for all this extra complexity, there is little, if any, evidence that lowering the cash ISA allowance will encourage more people to invest for the long term.”

Selby suggested many savers will instead choose to put less money into cash ISAs and opt for cash alternatives outside of ISAs, such as NS&I’s Premium Bonds or taxable savings accounts.

He added: “It would have made far more sense to focus ISA reforms on the needs of retail investors by simplifying the system, starting by combining cash ISAs and stocks and shares ISAs into a single main vehicle for short-term saving and long-term investing.”

Money market funds and other near cash assets might be restricted in some way but it remains subject to the final HMRC rules.

Do money market funds keep up with inflation?

In money market funds, your savings are still vulnerable to the effects of inflation. This means there is a risk that its value will be eroded over time. Your cash in these funds may not keep pace with the rising cost of living over the longer term.

This is one important reason these funds are not regarded as being suitable for growing savings over the long term as yields are typically below inflation.

Are there any other risks?

While they are considered one of the lowest-risk investment options, it’s important to know that money market funds are not without risk. As with any kind of investment, it is still possible to end up with less than you put in.

Plus, unlike a standard savings account, there are charges to factor in, though the fees are on the low side at around 0.1% and could still leave you better off with the returns being tax-free via the ISA wrapper.

However, you won’t get consumer protection for your investments in a money market fund. Unlike UK-regulated savings accounts, money market funds are not backed by the Financial Services Compensation Scheme (FSCS), which allows you to claim up to £85,000 back if the financial institution your savings are with fails.

What alternatives are there?

If you want to take a little more risk, but stay in the low-risk zone, you can look at short-dated fixed income (bonds). They could be another route to finding cash-like returns without adverse risk.

Bonds, also known as fixed income or fixed income securities, are a form of IOU. You lend money to a company or government, and it pays you a fixed return – sometimes called a coupon – for doing so. At the end of the bond’s term, when it matures, you get back the original amount you paid for the bond.

It’s possible to invest savings in a bond fund, which contains a collection of bonds and can be held in a stocks and shares ISA.

There are lots of types of bond funds to choose from. Some stick mainly to government bonds, while others focus on corporate bonds issued by companies. Strategic bond funds have more freedom to move around the market and pick where they see the best opportunities.