Money market funds invest in short-dated, high-quality debt from governments, banks and companies. The amount invested in these funds has exploded over the last five years. Back in 2021 US money market funds – which make up a significant portion of MMFS worldwide – had a little over $5tn invested in them according to the SEC. Today it’s more like $8.4tn.
Given the very impressive returns that have been on offer from global stock markets in that time, the global stock market is up 82.1%* in five years, you might wonder what has drawn investors to this relatively unglamourous corner of the investment universe. The answer is income – where money market funds have been transformed in recent years. Past performance isn’t a guide to the future. (Source: *Lipper IM, to 30/09/2026)
Investors should note that although they’re lower risk money market funds are still investments, so they could fall as well as rise and you might get back less than you invest. They don’t come with the same guarantees or protection as cash deposits. This article isn’t personal advice. If you’re unsure about whether an investment is right for you talk to a financial adviser.
How does a money market fund work?
Short-dated debt is lower risk than longer dated debt.
Companies rarely go from high quality to financial distress in a short spell of time, which means you don’t have to worry too much about getting paid back. You’re also less exposed to changes in interest rates – because as interest rates rise you will quickly see the benefit as old debts mature and new ones are bought.
Low risk and high quality mean these debts are usually easy to value and easy to trade, meaning they’re very liquid. As a result, they can be a good place to park money that might otherwise have been left in cash, potentially earning a higher return.
Why are money market funds booming?
Because the underlying investments in a money market fund do not have long until they mature, and are considered high quality, the rate of interest investors get paid is very closely tied to prevailing interest rates.
When central banks raise interest rates the interest paid by money market funds generally rises quickly too. Unlike a bank savings account, the rise is driven by the market rather than at the bank’s discretion – and many banks have been slow to pass higher interest rates on to savers.
Central banks have raised interest rates substantially over the last five years. Since September 2021 the Bank of England base rate has gone from 0.1% to 3.75%, the Federal Reserve rate has gone from 0.09% to 3.75%, and the European Central Bank rate has gone from 0.0% to 2.65%. That has led to a steady rise in the interest rate paid by money market funds.
Five years ago, investors were getting an average yield of just 0.57% from a money market fund. Better than you could get on many easy access cash accounts – but unlikely to be enough to live on.
Today the average money market fund yield is far higher.
Crucially, for UK Money Market funds it’s higher than UK inflation right now – so you’re seeing a real terms increase in the value of your money. The yield on offer is variable, and not guaranteed.
Money market funds won't usually deliver the long-term growth potential of stock markets, but an above inflation yield and relatively low risk is a compelling combination for investors looking to help shelter the value of their money.
It's no surprise investors around the world have been taking notice.
That’s why HL is launching a new Money Market Fund with the lowest ongoing charge in the UK (HL account charge also applies), and it will be available exclusively to HL clients.
The HL Money Market Fund is run by Hargreaves Lansdown Fund Managers Ltd, part of the Hargreaves Lansdown Group.