What is a money market fund?
What is a money market fund? Learn how money market funds work, how they generate returns and when you might consider using one.
Money market funds sit somewhere between cash and longer-term investments.
They aim to provide a slightly higher return than cash, while taking less risk than shares and bonds1.
In this article, we'll explain what money market funds are, how they work and some of the factors to consider before investing.
What is a money market fund?
Money market funds invest in short-term loans issued by governments, banks and companies with strong balance sheets and high credit ratings. These organisations pay interest on the money they borrow, which helps generate returns for investors in the fund. Money market funds can also hold cash.
The loans that money market funds invest in generally mature within a few weeks or months. These short timeframes mean there’s a high degree of certainty, making money market funds a lower-risk investment than shares or bonds.
Why might someone invest in a money market fund?
Money market funds are generally used for money that may be needed in the short term, rather than for building wealth over many years.
You might use a money market fund if you’re:
- holding money temporarily while deciding where to invest
- looking for a lower-risk investment for money you’ll need soon
- retired and want money readily available for upcoming withdrawals, so you don’t have to sell shares or bonds when markets fall
Money market funds can be particularly useful when you have money that you’re not ready to invest for the long term, but don’t want sitting idle.
How do money market funds generate returns?
The return from a money market fund comes from the income generated by the loans it holds.
This income builds up within the fund and investors benefit in one of two ways, depending on whether they hold income units or accumulation units:
- Income units: the income is paid out to investors as regular distributions.
- Accumulation units: the income is automatically reinvested in the fund. Rather than receiving a payment, investors benefit through an increase in the value of their holding.
You can learn more about the difference between the two approaches in our article on income versus accumulation share classes.
The income generated by a money market fund is commonly expressed as its yield. The yield shows the income produced as a percentage of the fund's value.
Because money market funds invest in short-term loans, their yields tend to respond relatively quickly to changes in interest rates. When interest rates rise, the income generated by the fund may increase. When interest rates fall, it may decrease.
As a result, the returns investors receive from a money market fund can change over time.
What are the risks?
Although money market funds are generally considered among the lower-risk investment options available, they are not risk free.
Like any investment, the value of a money market fund can fall as well as rise, and returns are not guaranteed.
It's also important to understand what money market funds are designed to do. They're intended to provide a home for short-term cash holdings, not long-term growth. If you're saving for a goal that is 3-5 years away or more, a money market fund is unlikely to provide the same growth potential as investments such as shares.
That's because money market funds are designed to preserve capital and generate income, rather than deliver the long-term growth that many investors seek when investing in shares.
How easy is it to access your money?
Money market funds are designed to be highly accessible. You don't have to lock your money away for a set period.
You can sell units in a money market fund whenever you need to. However, like all funds, it can take a few days for a sale to complete and the proceeds to be returned to your account.
It's worth remembering that a money market fund is an investment, not a cash deposit. That means its value may be lower when you come to sell it than when you invested, although this would be very rare.
What charges apply?
As with other funds, money market funds charge an ongoing fee, known as the ongoing charges figure (OCF). This helps cover the costs of running the fund. The annual fund charge for Vanguard’s money market fund is just 0.12%.
When you invest through an investment platform, there are also platform charges.
At Vanguard, we focus on low, transparent costs. You can see a breakdown of our costs on our fees and charges page.
The bottom line
Money market funds are designed to provide a lower-risk way of investing money that may be needed in the short term.
Whether you're saving for a near-term goal or deciding where to invest, they can provide a home for money that you don't need today, but aren't ready to commit to long-term investing.
1 Bonds are a type of loan issued by governments or companies, which typically pay a fixed amount of interest and return the capital at the end of the term.
Investment risk information
Investing gives your money the opportunity to grow over time, but market movements mean values can rise and fall along the way.
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.
Important information
This is a marketing communication.
Vanguard only gives information on products and services and does not give investment advice based on individual circumstances. If you have any questions related to your investment decision or the suitability or appropriateness for you of the product(s) described, please contact your financial adviser.
For further information on the fund's investment policies and risks, please refer to the prospectus of the UCITS and to the KIID before making any final investment decisions. The KIID for this fund is available, alongside the prospectus, which is available in English only, via Vanguard’s website.
This is designed for use by, and is directed only at, persons resident in the UK.
The information contained herein 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 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 "units/shares", and the receipt of distribution from any investment.
The Authorised Corporate Director for Vanguard® Investments Money Market Funds is Vanguard Investments UK, Limited. Vanguard Asset Management, Limited is a distributor of Vanguard® Investments Money Market Funds.
For investors in UK domiciled funds, a summary of investor rights can be obtained, and is available in English.
The Vanguard Sterling Short-Term Money Market Fund may invest more than 35% of its scheme property in transferable securities and money market instruments issued or guaranteed by the UK.
Issued by Vanguard Asset Management Limited, which is authorised and regulated in the UK by the Financial Conduct Authority.
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