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What are money market funds and how do they work?

Key takeaways:

What are money market funds? Low-risk pooled vehicles that invest in short-term, high-quality debt such as Treasury bills, commercial paper and certificates of deposit, designed to preserve capital, provide liquidity and deliver modest, rate-linked returns.
How they work: Money market funds typically aim to maintain a stable £1 NAV and offer daily or T+1 liquidity, making them suitable for managing operational and surplus cash.
Pros & cons: They provide stability, strong liquidity and diversification, with returns often more competitive than traditional savings accounts - though yields remain modest and closely tied to short-term interest rates.
Who uses them: Widely adopted by corporates and treasury teams seeking secure, flexible management of surplus cash.

Holding short-term cash is a reality for most businesses, whether it’s to cover day-to-day operations, support liquidity buffers or manage temporary surpluses. Deciding where to keep that cash, however, isn’t always straightforward. Traditional savings accounts offer security but often low returns, whilst riskier investments may not be suitable for funds that need to remain readily accessible.

For many corporate and institutional investors, money market funds have become a practical tool for navigating today’s interest rate landscape. This guide takes a clear, structured look at how money market funds work and what they can – and can’t – offer, helping you understand their role within short-term cash management.

What is a money market fund?

A money market fund (MMF) is a low-risk mutual fund that invests in high-quality, short-term debt instruments to provide liquidity and capital preservation for investors. These funds aim to maintain a stable £1 net asset value (NAV), making them a popular choice for short-term cash management.

What do money market funds invest in?

Money market funds typically invest in a range of high-quality, short-term financial instruments designed to preserve capital and maintain liquidity. These commonly include:

Treasury bills

Short-term government securities such as UK Treasury bills (T-bills), issued at a discount and redeemed at face value.

Commercial paper (CP)

Short-term, unsecured debt instruments issued by corporations to fund working capital or other near-term financing needs.

Bills of exchange

Written orders requiring one party to pay a fixed amount to another at a future date, commonly used in trade finance and more common in UK and international markets.

Certificates of deposit (CD)

Fixed-term deposits issued by banks that pay interest and can be traded on the secondary market prior to maturity.

Short-dated bonds

Very short-term investment-grade notes or floating-rate notes issued by banks and corporates, used for diversification and to help support stable yields.

Sale and repurchase agreements (repos)

Short-term secured lending arrangements where securities are sold with an agreement to repurchase them at a set date and price.

How does a money market fund work?

Money market funds operate by pooling cash from multiple investors and managing it within a diversified portfolio of short-dated, high-quality debt instruments. The aim is to preserve capital while keeping funds readily accessible. In practice, they work in a few key steps:

Pooling investor capital: The fund gathers money from multiple investors to manage it collectively.
Investing in low-risk instruments: Once pooled, the fund invests in high-quality, short-term assets such as government securities, commercial paper, certificates of deposit and repos.
Maintaining a stable NAV: Fund managers aim to keep the fund’s net asset value (NAV) at a stable £1 per share by focusing on highly rated, short-duration investments with minimal price fluctuation.
Generating yield: Investors earn returns from the interest generated by the underlying securities.

Why invest in money market funds?

Money market funds (MMFs) are widely used by corporates and institutional investors as a low-risk tool for managing short-term cash.

Capital preservation

Money market funds prioritise the safety of the principal investment by investing in high-quality, short-term, low-risk debt instruments. This makes them an attractive option for conservative investors or anyone looking to hold cash temporarily without taking on significant risk.

Diversification

These funds spread investments across a broad mix of short-term instruments, issuers, and sectors. By diversifying in this way, money market funds help reduce the impact of any single issuer defaulting and further support the stability of the investment.

Competitive yields

While they won’t match the returns of higher-risk assets like stocks, money market funds often offer better yields than traditional savings accounts. They provide a practical way to earn a modest return on idle cash while maintaining a low-risk profile.

High liquidity

Money market funds typically offer fast and flexible access to funds, often allowing withdrawals at any time without penalties. This high liquidity makes them ideal for emergency funds or short-term financial goals where quick access to cash is essential.

Low minimum investment

Many money market funds have low minimum investment thresholds, making them accessible to a wide range of corporates and treasury teams.

Automatic reinvestment

Most money market funds offer automatic reinvestment of dividends, helping the invested balance grow through compounding without requiring any additional action.

Professional management

Money market funds are actively managed by experienced investment teams who continuously assess credit quality, liquidity, market conditions and interest-rate movements. This professional oversight helps ensure the portfolio remains resilient, liquid and aligned with regulatory requirements.

Disadvantages of money market funds

Moderate returns

Money market funds typically deliver smaller returns than higher-risk investments such as equities or longer-duration bonds. They are designed for stability and short-term cash management rather than long-term capital growth, which may limit their appeal for return-seeking investors.

No government protection

Unlike bank deposits, money market funds are not covered by government guarantee schemes such as the Financial Services Compensation Scheme (FSCS). This means capital is not guaranteed if the fund or an issuer encounters financial difficulties.

Fees

Whilst typically low, some money market funds charge management fees and withdrawal fees, which can reduce the overall returns.

Sensitivity to interest rates

Yields on money market funds move closely with short-term interest rates. When central banks cut rates, MMF returns can fall quickly, reducing their attractiveness relative to other cash or liquidity options.

Money market funds regulation

UK money market funds are regulated under the UK Money Market Funds Regulation (MMFR) and supervised by the Financial Conduct Authority (FCA). This regulatory structure sets strict rules around credit quality, liquidity, diversification and transparency, helping to protect investors and maintain the stability of MMFs.

Types of UK money market funds

Constant NAV (CNAV), aims to maintain a stable NAV, e.g. £1 in Sterling.
Variable NAV (VNAV), uses "mark-to-market" accounting to value assets, so the NAV per unit price fluctuates daily with market conditions.
Low-volatility NAV (LVNAV), a common structure in sterling markets, aiming to keep the price steady at £1.00 per unit, so long as the value of the underlying assets values do not move by more than 0.2%.

Key requirements of UK money market funds

Funds must invest in high-quality, short-term instruments with a maximum maturity of 397 days.
They must hold at least 10% daily liquidity and 30% weekly liquidity.
Exposure to any single issuer is limited to help reduce risk.
Money market funds must carry out regular stress tests to assess their resilience to market shocks and liquidity pressures.

Money market funds vs savings accounts

	Money market fund	Savings account
Definition	A type of mutual fund that invests in high-quality, short-term debt instruments	A deposit account offered by banks or building societies to store money securely
Returns	Typically higher than standard savings accounts, but can fluctuate with interest rates and market conditions	Lower than money market funds but stable; interest is fixed or variable depending on the account
Risk level	Low risk, but returns can dip when interest rates move or markets fluctuate. Capital is not guaranteed	Very low risk; deposits are protected up to £85,000 per institution under the FSCS in the UK
Access	Usually T+1 or same-day access depending on the fund and dealing cut-off times	Instant access for easy-access savings accounts
Protection	Not covered by FSCS; regulated by the FCA as an investment product	Covered by the FSCS up to £85,000 per eligible institution
Best for	Investors seeking higher returns on surplus cash with low risk and daily liquidity	People prioritising security and immediate access to their money

Money market funds: how MillTech supports cash management

Money market funds are a core component of cash management for corporates and fund managers seeking to optimise idle cash. However, accessing and managing MMFs can be operationally complex, particularly when dealing with multiple providers and onboarding requirements.

MillTech’s cash management solution is designed to simplify this process, providing treasury teams with streamlined access to tier 1 MMF providers through a single platform. By aggregating a network of multi-currency funds, MillTech helps clients diversify counterparty exposure and seek the best available returns on surplus cash, while retaining the daily liquidity and low-risk profile that money market funds are designed to deliver. Combined with highly competitive rates, best execution, and a zero-fee service model, MillTech enables investors to enhance cash returns without adding complexity.

Our solution delivers:

Enhanced returns - Earn more from your cash without increasing your operational burden. Customisable rules, automated best execution and optimised liquidity – all built in.
Time saving - Express onboarding with multiple Tier-1 money market fund providers and trade-life automation. Navigate the best available rate and streamline cash operations via a single platform
Risk reduction - Spread your counterparty risk across multiple AAA-rated funds and get enhanced control through customisable allocation rules. As an independent specialist, we help clients achieve optimal outcomes with intelligent tools for risk identification and informed decision-making.

Find out more here: https://milltech.com/product/cash-management

FAQ's

Who are money market funds suitable for?

Money market funds are suitable for corporates and treasury teams who require a low-risk, highly liquid place to park short-term cash.

Are money market funds safe?

Yes, money market funds are generally considered safe, low-risk investments, but they can fluctuate slightly in value due to market movements and interest rate changes, and they are not protected by the FSCS.

Can you lose money in a money market fund?

Yes, you can lose money in a money market fund because its value can fluctuate with market conditions and it is not protected by the FSCS.

Are money market funds a good place to park cash?

Yes, money market funds are generally considered a good place to park cash because they offer low risk, daily liquidity and competitive short-term yields compared with traditional savings accounts.

Are money market funds better than savings accounts?

Money market funds often provide higher yields than savings accounts, but they carry slightly more risk because they are not FSCS protected and can fluctuate in value.

Do money market funds have fees?

Yes, money market funds may charge management fees, these fees are usually low but can reduce overall returns.

How quickly can you withdraw money from a money market fund?

Most money market funds offer daily access to cash, with withdrawals typically settling on a same-day.

Are money market funds protected by the FSCS?

No, money market funds are not protected by the FSCS as they are classed as investment products.

What is a money market mutual fund?

A money market mutual fund is just another name for a money market fund, referring to the same low-risk investment that pools cash to invest in high-quality, short-term debt instruments built to preserve capital and provide daily liquidity.

Are money market funds short-term investments?

Yes, money market funds are designed as short-term investments, typically used for managing liquidity and surplus cash with low risk and competitive returns.

Cash Management services are not available in the US