Episode 432 - On this week's show I explain why history suggests that the Bank of England base rate (and therefore mortgage rates) could stay higher for longer if a second wave of inflation is to be avoided. We also look at money market funds, explaining their pros, their cons, the risks and the potential returns. Finally, we discuss why you should read your energy meter this weekend and how much your energy bill is likely to be this winter compared to last winter.
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What is a Money Market Fund?
A money market fund (MMF) is a type of investment fund that pools money from lots of investors and invests it in short-term, low-risk securities typically government bonds, treasury bills, certificates of deposit, and highly rated corporate debt. The goal is to offer investors a place to invest their cash where it earns a return, usually higher than an ordinary savings account, while still being liquid (easy to access).
Unlike a savings account, a money market fund isn’t a bank product. It’s an investment, not a deposit, which means it doesn’t carry the same government-backed protection that savings accounts do (like the FSCS protection up to £85,000 in the UK).
How Does It Differ From a Savings Account?
1. Who provides it:
- Savings account: Offered by banks/building societies.
- Money market fund: Offered by investment providers, brokers, or fund managers.
2. What your money does:
- Savings account: Bank lends out your deposit and pays you interest.
- Money market fund: Invests in short-term debt securities and pays you a return from the income earned.
3. Safety:
- Savings account: Capital is protected (up to FSCS/FDIC limits).
- Money market fund: Designed to be low risk, but values can fluctuate slightly — and no guarantee of protection.
4. Access:
- Savings account: Can be instant access or fixed-term.
- Money market fund: You won’t usually be able to withdraw the funds on the same day, as it can take a few days for settlement.
5. Returns:
- Savings account: Fixed or variable interest rate set by the bank.
- Money market fund: Return moves with short-term interest rates — can go up or down.
Pros of a Money Market Fund
Pros:
- Can provide higher yields than most savings accounts, especially when interest rates are high.
- Highly liquid — you can generally access your money within a few days.
Cons of a Money Market Fund
- Not risk-free — although very low risk, the value of your investment can fall.
- No FSCS protection (or equivalent), so if the fund fails, you could lose money.
- Returns can fluctuate and may be lower than inflation.
- Settlement delays — withdrawals might take a day or two, not same-day access like a savings account.
- Fees — management costs, though usually low, can eat into returns.
Risks to Be Aware Of
- Credit risk: If one of the fund’s investments defaults, the fund could lose money.
- Interest rate risk: Returns rise and fall with central bank rates — in low-rate environments, yields may be small.
- Liquidity risk: In times of financial stress, funds might limit withdrawals.
Resources:
Links referred to in the podcast: