What is a money market fund?

Across the UK, treasury teams and finance directors often have cash reserves that could be put to better use than in a standard business account. Money market funds (MMFs) are a popular option, offering rapid access to cash and a modest return. However, many finance professionals use these funds without completely understanding what happens to their money after it is invested.

This guide covers what money market funds are, how they generate returns, what their structure means for safety, and how they compare with wholesale money markets.

What is a money market fund?

A money market fund collects cash from many investors and invests it in a mix of short-term debt. The fund manager chooses the investments and manages the portfolio for everyone who owns units in the fund. Most investments mature within days or months, so the fund stays short-term. This setup lets investors access their cash the same day or the next day.

What do money market funds invest in?

A typical fund invests in government treasury bills, certificates of deposit, commercial paper, and short-term repo agreements. Repo is a type of secured lending where cash is exchanged for high-quality collateral, which an independent custodian holds. You can find a full explanation of this collateral process in our guide to the repo market.

​Government bills are among the safest investments, while commercial paper from investment-grade companies carries more risk but offers a higher yield. The fund manager combines these different investments to balance credit quality, yield, and liquidity in the portfolio.

How are money market funds regulated in the UK?

Money market funds must follow the UK Money Market Funds Regulation, which was introduced after the 2008 financial crisis to improve liquidity standards. There are two main types of funds, based on how long their investments last. Short-Term MMFs invest in assets that mature within 397 days, while Standard MMFs can include longer-term investments, such as short-term corporate bonds, for a slightly higher yield.

Another way to group funds is by how they are valued: Public Debt CNAV, Low Volatility NAV, and Variable NAV. Each type uses a different method to price its units, which affects how stable the fund’s daily value appears. Most UK corporate treasurers prefer Short-Term LVNAV funds because they offer a stable unit price and daily access to cash.

How do money market funds work?

A fund manager’s two primary aims are to protect the original investment and keep cash available when needed. To achieve this, the fund holds a mix of investments that mature at different times, so some assets mature every day. Regulations require funds to keep a certain amount of daily and weekly liquid assets, which helps protect against sudden withdrawals. This approach lets the fund handle redemptions without selling assets at a loss.

How is the return generated?

The fund earns yield from the interest and discount income paid by its investments each day. This income usually follows the Bank of England base rate, rising or falling as rates change. Many funds also use reverse repo, lending cash against government bonds held by an independent third party.

This approach gives the fund both secured and unsecured investments, which together shape investors' overall return. You can read more about how this collateral is managed in our guide to secured lending arrangements, which uses a similar structure.

Are money market funds safe?

Money market funds are considered safe because they’re diversified, have high credit quality, and are closely regulated. Each investment must meet a minimum credit rating, which limits risk. No single issuer can make up more than a certain share of the fund, which limits exposure to one party. 

The Financial Conduct Authority oversees all UK funds and enforces the required liquidity buffers. However, these measures don’t remove all risk, and unit prices can still drop if the underlying investments lose value.

What should treasurers understand about structural risk?

Money market funds are different from bank deposits in one key way: they’re not covered by the Financial Services Compensation Scheme. All investors’ cash is pooled together in the fund, so everyone is exposed to the same investments and, during times of stress, the same pressures to withdraw. Regulators call this pooling, along with the gap between daily liquidity and longer-term investments, maturity transformation.

This is a built-in feature of money market funds, not a flaw. Treasurers should understand this before deciding how much cash to invest in a fund.

Comparing money market funds with direct market access

When you place cash in a single bank deposit, all your money is with one counterparty, money market funds spread cash across many issuers in one fund. However, they don’t provide transparency down to each investment, since investors own units in a pooled fund.

Investors don’t have a direct claim on any particular bond or deposit in the fund. For treasurers managing large cash balances, this difference matters when deciding how much to invest.

TreasurySpring provides a structure that is more like holding a fixed-rate bond than owning units in a pooled fund. Investors choose a single government, bank, or corporate counterparty and lock in a fixed rate for a set period. The investor holds this position directly, rather than sharing it with others in a pooled fund.

Cash still moves through the same government, bank, and corporate markets, including secured repo, but it never goes through a pooled fund. You can see how this works for each instrument in more detail on our platform.

Choosing the right structure for your cash

Money market funds are still a practical way to earn a return on short-term cash, thanks to diversification and strong regulation. By understanding how these funds pool cash and manage maturities, treasurers can decide how much of their reserves to invest. This knowledge also helps them decide whether to place some cash in a more transparent, separate structure.

TreasurySpring lets institutions access the same wholesale money markets banks use for their own cash. Each investment matches a single issuer and a set term. Pricing and reporting remain fully transparent for the entire investment period.

To see how this compares with your current money market fund allocation, contact our team. We can explain your options and show how a segregated structure could complement what you already have.

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*TreasurySpring’s blogs and commentaries are provided for general information purposes only, and do not constitute legal, investment or other advice.