In an attempt to contain persistently high inflation, the Bank of England (BoE) has remained committed to its policy of raising its base rate in response.

As of 3rd August, the BoE rate stands at 5.25%... Yet high street banks have been slow to pass that on to consumers. For example, two of the UK’s largest banks, HSBC and Lloyds, are currently offering customers 2.00% AER and 1.80% AER (respectively) on their traditional current accounts.

Given that The Office for National Statistics (ONS) has also reported The Consumer Prices Index (a measure of inflation) rose by 7.9% in the 12 months to June 2023, this situation presents a challenge for savers trying to prevent the value of their cash from being eroded.

One option is to invest money, and whilst there are many strategies available, a typical investment portfolio will contain some combination of company stocks and professionally managed funds.

The drawback of investing is that it contains a degree of risk. If the value of your investments decreases you could lose money… So what’s the solution?

We can’t advise you or tell you what to do with your cash, but if you’re looking for a low-risk way to earn a competitive return (versus a bank account) in the short term, a Money Market Fund (MMF) could be just the thing!

*Variable rate and current account comparisons are correct as of 11th August 2023. Projected return is gross of fees. Funds are subject to charges and expenses, which may impact your investment's performance. For more on fees, see ‘How do I invest in money market funds?’ section below. A forecast is not a reliable indicator of future performance. Returns are not guaranteed.

What is a money market fund?

A money market fund invests in high-quality assets that generate interest.

Our MMF is what’s known as The UK Safe Haven fund. A type of generally low-risk mutual fund that aims to generate a return which tracks the Bank of England base rate (currently, the variable rate stands at 5.30%*).

It invests in short-term assets, like interest-generating UK Government bonds, meaning it will typically have a better variable rate than one you might expect to receive in a current account from a high-street bank.

The types of low-risk money market instruments contained include:

Certificates of deposits

A bank-issued savings certificate that earns interest on a lump sum for a fixed period of time (with short-term maturity).

Commercial papers

An unsecured, short-term debt instrument issued by corporations to finance short-term expenses e.g. the payroll for their staff.

UK Government bonds

Known as treasury bills in the US, government securities are called gilts in the UK. They’re an investment vehicle that delivers a fixed return until expiry.

How do money market funds work?

Money market mutual funds are cash-like investments that can be held within your Stocks & Shares ISA, General Investment Account (GIA) or Self Invested Personal Pension (SIPP).

MMFs invest in securities considered to be low-risk, like government bonds and commercial paper, which often reach maturity in under a year.

By investing in short-term securities, the main goal of our MMF is to reduce uncertainty and manage risk. The theory is, the longer the period over which you lend your money to a person, business or government… The greater the risk that they might default and you might not get your investment repaid.

The variable rate you could earn is based on a forecast of the return you can expect to receive if you remain invested for a full year. The rate updates on a daily basis and returns aren’t guaranteed.

Why invest in money market funds?

Short-term money market funds focus on assets that are less prone to market fluctuations and resulting uncertainty.

By managing price volatility and prioritising investments deemed to be high quality (your money is effectively being loaned to governments, banks and companies with a healthy balance sheet), MMFs can be considered to be low risk, versus other types of investments.

Though the fixed income they offer might not match the potential returns available from other (higher-risk) investments, money market funds are intended to offer investors quick access to their cash.

This means they’re often used as a place to hold money, to still earn a competitive return while deciding on longer-term investments.

Which are better, money market funds vs savings accounts?

Though not quite as safe as cash, money market funds are considered extremely low-risk, on the investment spectrum. This makes them suitable for investors with short-term horizons who want to protect their capital and maintain liquidity. Because the short-term nature of the underlying investments means they’re not prone to daily fluctuations.

However, there is still an inherent element of risk. Even with the best money market funds can’t guarantee returns, so if you’re uncomfortable with that risk you may wish to consider a safer way to invest your cash or investigate more traditional savings accounts.

MMFs do offer the potential for a higher return versus the interest you might expect to receive in a current account from a high-street bank. But they lack the spending functionality of bank accounts.

Also, it’s worth remembering that the predicted return offered by a MMF is variable, which means you don’t know what the return on your investment will be. This can be beneficial if the interest rate increases, but if it goes down and the value of your investment falls, you may end up losing money.

How do I invest in money market funds?

Our MMF has been added to the introductory range of 13 investment funds included with a Plum Pro subscription (price £2.99 per month, with a 1-month free trial).

The money market fund can be found within the Discover section of the investments part of the app and can be held within your existing Stocks & Shares ISA or General Investment Account.

As with all Plum investments, customers can start with as little as £1.

Visit our website to learn more about our costs and charges when investing.

What other benefits can a Plum subscription offer?

In addition to the smart stuff in our Basic tier, Plum Pro provides a better rate of interest, gamified deposit Rules, access to our introductory range of investment funds, customisable Pockets and Cashback.

Here’s what you can expect from Plum Pro:

• Get access to a better interest rate (versus our Basic tier).
• Take on our 52-Week Challenge to set aside £1,378 in a year;
• Or enable Rainy Days to deposit when it rains where you live.
• Create and customise up to 15 Interest Pockets and set goals.
• Choose from our range of 13 diversified investment funds.

And we also have 2 higher tiers...

Plum Ultra (£4.99 p/m)

Access our most advanced budgeting tools, order your free Plum debit card and add the 1p Challenge and Naughty Rule to the deposit Rules available.

Plum Premium (£9.99 p/m)

Earn our best rate of interest, choose from our full range of 3,000 company stocks and 22 investment funds, and automate your investing strategy with Price Alerts and Recurring Buy Orders.

Easy Access Interest Pockets are provided by Investec Bank Plc. and protected by the Financial Services Compensation Scheme (FSCS). Capital at risk if you invest.

The UK Safe Haven fund is a UK money market fund. This type of fund typically only invests in the safest assets over the short term, like UK Government bonds and debts from banks and companies with strong balance sheets and high credit ratings. That means they are generally considered low-risk compared to other investments, especially as the shorter timeframes mean there is less uncertainty.

You shouldn’t invest or use any financial product unless you understand its nature and your exposure to risk. If you choose to invest you should be satisfied your choices are suitable for you and your circumstances.

The information contained in this article is for general guidance on matters of interest only, and as such is not intended to constitute advice or a recommendation.