Investors inflate money market funds

Financial Planners

UK-based money market funds saw a surge in inflows ahead of the 5 April tax year end.

The investment platform, led by market leaders Hargreaves Lansdowne and Interactive Investor, said clients turned to money market funds as yields rose in the first quarter of this year.

Hargreaves reported a “significant increase” in net inflows into money market funds in the first quarter. Interactive Investor, on the other hand, saw him grow by 300% over the same period. Analysts said this was from a low base, but indicated that after years of near-zero interest rates, money was returning for some investors.

Some investors are believed to be putting money in money market funds with the intention of putting cash into long-term stock purchases after the current turmoil subsides.

“Uncertainty has caused investors to pause briefly before making investment decisions, but the long-term outlook suggests investors should look elsewhere,” said Bessie Milkem, head of international cash management at asset manager BlackRock. We’ll have to go back to the asset class,” he said.

Shifting behavior patterns signal a tentative stance among retail investors whose confidence is undermined by volatility, with improved cash offers and a safe haven for savers looking to top up their tax wrappers. offers.

Money market funds invest in safe liquid assets that mature soon, such as short-term government bonds. Investments are considered low risk, but unlike bank deposits, they are not covered by deposit protection schemes.

Investors can use money market funds to deposit their cash balances inside tax-free wrappers such as Sipp and Isa, at a more attractive interest rate than just storing cash on the platform, which has an interest rate of around 1%. available. This is especially advantageous given the reduced tax deductions for savings other than tax-free wrappers.

“In certain circumstances, it makes sense for investors,” said James Norton, head of financial planners at Vanguard UK. He said some people are using money market funds to delay investment decisions, and retirees who keep some cash as income may be looking for better returns.

“Money market funds should be used with caution as they provide lower returns than stocks over the long term,” Norton added.

Vanguard’s sterling-denominated money market fund saw a 29% jump in net worth from February to March this year, according to Morningstar. Vanguard funds yield around 2.2%, while other funds offer around 4%, which is closer to bank rates.

“Most of these products try to track you. [the Bank of England’s risk-free short-term rate]Rob Morgan, analyst at investment management firm Charles Stanley, said: “You can use cash tactically to get returns and that will be an important part of portfolio construction.”

Despite rising demand, fund flows remain relatively lower than in the U.S., with large banks such as JPMorgan Chase and Bank of America stagnating despite higher Federal Reserve interest rates. , retail investors flocked to money market funds late last year after showing low returns on deposits.

Unlike US banks, most banks and building societies in the UK were quick to raise interest rates on savings accounts following the monetary tightening. Easy access accounts have reached around 3% and Barclays offers his 5% rewards customers on balances up to £5,000.

Inflation eased slightly to 10.1% in Mar, but is likely to remain high for most of the year. The Bank of England is expected to continue raising interest rates in response, keeping money market funds attractive for the foreseeable future.

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