Cash ISA versus cash funds: the basics

Important information - The value of investments and the income from them can go down as well as up, so you may get back less than you invest.

Investors with a low-risk appetite will prefer to keep at least some of their money in cash. Cash is safer than almost all forms of investing, but potentially at the expense of lower returns.

But how to keep your savings from lagging behind inflation? Cash funds, otherwise known as money market funds, are one option.

• Learn about the cash and cash-like options if you invest at Fidelity.

What is a Cash ISA?

A Cash ISA is a savings account held within an ISA wrapper. They operate much the same as easy-access savings accounts. Your money earns interest each year which is set in advance, but subject to change.

This means you roughly know in advance what your returns will be, unlike with other forms of investing.

The benefit of saving in a Cash ISA over a regular savings account is that any interest earned is free from tax. However, you have a limited ISA allowance of £20,000 a year meaning any cash savings take away allowance from potential investments.

What is a cash fund or money market fund?

Money market funds are a type of investment fund. Savers’ money is pooled with other investors and used to purchase assets in the pursuit of growth.

Money market funds specifically target “cash-like” assets like bonds from reputable companies and government debt. This makes them lower risk than funds investing in stocks and shares.

There are two types. Short term money market funds are a safer bet as they target bonds maturing in the next few months. Standard money market funds hold some forms of longer-term debt and so are slightly more risky. But the returns are likely to be higher.

While money market funds often return more than regular cash savings accounts, this is not guaranteed. In high interest environments savers may find that easy-access accounts deliver strong enough returns to negate the need for a money market fund.

It can also take a few days to withdraw your cash.

• Open a Stocks and Shares ISA to invest in cash funds

Which is right for me?

This will depend on your appetite for risk. Both options are far less risky than buying stocks and shares, but money market funds carry with them a slightly elevated risk profile.

However, they are likely to offer higher returns. So, if you are looking to boost your cash by a small margin over a short period of time, then you might want to opt for a money market fund.

Remember that even though money market funds aim to be similar to cash, diversification is still important. You should never keep all of your savings in one fund or asset.

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Read more from our series:

• Investing in cash in a Stocks and Shares ISA: the basics
• What is the FTSE 100? The basics
• Investing versus saving: the basics