A money market fund is a low-risk investment that gives you a place to hold rather than grow your savings, while aiming to give you a slightly higher return than cash.
As interest rates have risen, so has the yield on money market funds, once again making them attractive in many people’s eyes.
Our money market fund is called the Vanguard Sterling Short-Term Money Market Fund. Its forward-looking yield, using the yield to maturity figure, was 4.78% as at 11 July 2023. This means a holding of £10,000 would return about £478 gross over 12 months.
When you take into account the cost of investing with us, the net figure would be about £450, as well as the impact of any tax you may have to pay. We’ll explain more about the different ways to calculate the yield below.
You might buy a money market fund whilst you are trying to decide where to invest, or if you are retired and want to keep 1-2 years’ worth of spending out of the markets in case of short-term market fluctuations.
Want to know more about these funds? Read on. You can also find more information on our webpage dedicated to money market funds, or on the Vanguard Sterling Short-Term Money Market Fund overview page.
What does a money market fund invest in?
Instead of investing in bonds or shares, money market funds invest in different types of short-term loans that pay the holder interest, and which have to be repaid in a matter of weeks or months.
To reduce the risk of losing money, the fund managers buy these loans1 from governments, banks and companies with strong balance sheets and credit ratings.
A money market fund is still an investment, so the value can go down as well as up. But because of the short-term nature of the investments and who it is being lent to, it is one of the lowest risk investments you can make.
Why would you invest in a money market fund?
The return on a money market fund comes from the income it pays, or what it ‘yields’. Conceptually, the income you earn from a money market fund is similar to earning interest income on cash – although they should not be confused with deposit accounts, because the value of your investment may fall as well as rise.
As mentioned above, you might use a money market fund while thinking about what to invest in. In theory, using a money market fund allows you to earn a return while you decide.
Please note, a money market fund is not intended as a long-term investment, as inflation is likely to erode its value over time. You should therefore look to review this on a regular basis.
Alternatively, you might be drawing down your pension, and want to keep 1-2 years’ worth of spending in cash. Investing in a money market fund could potentially offer you a higher return than just keeping it in the bank.
Why does the fund appear to have different yield figures?
While cash has a very clear interest rate, yields on money-market funds can be measured in different ways. For our fund, you can find these measures under the ‘Portfolio Data’ tab on the fund overview page on our website.
One measure of yield is to take everything that’s been paid out over the past 12 months and divide it by the fund price today.
That figure is called the net distribution yield. As at 11 July, it was 2.9% on the Vanguard Sterling Short-Term Money Market Fund.
But with yields having risen over the last 18 months, you might want a more forward-looking figure like the ‘yield to maturity’. Put simply, this takes the yield of all the fund’s existing investments and divides it by the current fund price2.
As at 11 July 2023, this was 4.78%. The figure is updated on a weekly basis. The yield to maturity figure is not a guaranteed return, but an indication of how much might be paid out. If interest rates rise, we would expect the yield to maturity to rise, and conversely if interest rates start to fall, we would expect the yield on the fund to reflect that fall.
By contrast, we pay an interest rate of 2.45% for cash held on our platform, as at 11 July 2023, so if you are willing to take a relatively small amount of investment risk, a money market fund may be worth considering.
More on how a money market fund works
To view the performance Vanguard Sterling Short-Term Money Market Fund, click on the ‘Price & Performance’ tab.
At first glance, the pattern of performance may appear strange. The fund price moves in a kind of wave pattern, rising towards the end of the month before falling back.
But this is the fund working exactly as it is intended to. Income builds up throughout the month, with this reflected in the rising fund price. The price falls back to approximately £1 once the income is paid out.
It’s done that way to make sure investors in the fund are treated equally. All investors receive the same income distribution but the different price they buy at ensures they’re not getting any income for the month that is not due to them.
View our Distribution rates and dates.
How do I see the income that has been paid out?
If you log in and look under the ‘Transactions’ tab on the left-hand side of the website, you’ll see a series of tabs across the top, including one for ‘Cash statement’.
By clicking on ‘Cash statement’, you can see the income paid out from the money market fund; it will appear as ‘DIV: PJEM’.
Add all these transactions up, and you can see how much money has been paid out to your account.
Why is Vanguard’s money market fund not an index fund?
The Vanguard Sterling Short-Term Money Market Fund isn’t an index fund but rather an actively managed fund. It doesn’t seek to track the performance of a particular market index.
However, it does use a market index as a benchmark, for comparison purposes – the Sterling Overnight Index Average, or SONIA. This reflects the average rate of interest banks pay to borrow overnight.
If you think a money market fund might be suitable for you, visit the overview of the Vanguard Sterling Short-Term Money Market Fund.
1 With a maximum term of one year.
2 Technically, the yield to maturity figure also includes any gain you might expect to make on a bond or a loan. Bonds or loans might not trade at their face value for a number of reasons, but as they get closer to the date they are repaid, investors commonly expect any gap to close. The yield to maturity includes the expected return from the gap closing, though this is not guaranteed to happen. For a money market fund, the vast majority of the yield-to-maturity figure reflects income rather than any potential capital gain.
Investment risk information
The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.
Past performance is not a reliable indicator of future results.
The distribution yield reflects the amounts that may be expected to be distributed over the next twelve months as a percentage of mid-market unit price as at the date shown. It is based on a snapshot of the portfolio on that day. It does not include preliminary charge and investors may be subject to tax on distributions.
The underlying yield reflects the annualised income net of expenses of the fund (calculated in accordance with relevant accounting standards) as a percentage of the mid-market unit price of the fund as at the date shown. It is based on a snapshot of the portfolio on that day. It does not include any preliminary charge and investors may be subject to tax on distributions.
An investment in a money market fund is not a guaranteed investment. An investment in a money market fund is different from an investment in deposits, as the amount invested in a money market fund is capable of fluctuation. Money market funds do not rely on external support for guaranteeing the liquidity of the money market fund or stabilising the Net Asset Value per share. The risk of loss of the amount invested shall be borne by the investor.
For further information on risks please see the “Risk Factors” section of the prospectus on our website at https://global.vanguard.com.
If you have any questions related to your investment decision or the suitability or appropriateness for you of the product[s] described in this document, please contact your financial adviser.
This document is designed for use by, and is directed only at, persons resident in the UK.
The information contained in this document is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so. The information in this document is general in nature and does not constitute legal, tax, or investment advice. Potential investors are urged to consult their professional advisers on the implications of making an investment in, holding or disposing of shares and /or units of, and the receipt of distribution from any investment.
SONIA is the abbreviation for the Sterling Overnight Index Average, which reflects the average of interest rates that banks pay to borrow overnight, unsecured sterling cash on a given day.
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