TURMOIL in the banking sector has seen a massive surge in interest in money market funds all around the world. Investors have gravitated towards safer assets in the wake of the collapse of a few smaller US banks in recent weeks and, on this side of the Atlantic, the rescue takeover of Credit Suisse by Swiss rival UBS.

In the week to March 15, according to data from Refinitiv Lipper, more than $110bn poured into these safe haven funds. At the same time, nearly $20bn was pulled from global equity funds. So, what are money market funds, what do they offer investors and are they right for you now?

What is a money market fund?

A money market fund is an open-ended mutual fund which invests in a portfolio of short-term cash deposits, money market instruments and high-quality bonds. It is designed to provide a high level of stability and liquidity while also delivering a modest investment return that probably exceeds that on a short-term cash deposit in a bank or building society.

What sort of return should I expect?

Money market funds look to deliver a return over and above the Bank of England’s base rate or the Sterling Overnight Index Average (SONIA), a benchmark for short-term lending between financial institutions. After the recent rise in interest rates in the UK and elsewhere, this can, for the first time in many years, represent an attractive return for risk-averse investors.

How safe is a money market fund?

Because money market funds only invest in high quality assets with short maturities, they are considered to be very low risk. Unlike cash, there is a small chance that they could fall in value. But they are less likely than longer-dated bonds to be adversely impacted by rising interest rates. And they are likely to restrict their investments to securities which are very highly rated by well-known ratings agencies.

Who might want to invest in a money market fund?

Investors with a very low risk tolerance – perhaps because they are saving for a short-term goal or because they are concerned about market volatility – may be attracted by the stability of a money market fund and unconcerned by its relatively low return.

Money market funds can also be a good place to hold, rather than grow, your savings. For example, you may be unsure where you want to invest and need somewhere safe to park your cash while you decide.

An investor with a longer-term time horizon may be concerned that returns from money market funds have lagged behind those from shares and bonds over more extended periods.

Are there any drawbacks?

Money market funds are considered to be investments and not deposits. As such, they are not protected by the Financial Services Compensation Scheme. If you hold money with a UK-authorised bank, building society or credit union that fails, you can claim compensation from the FSCS of up to £85,000 or up to £170,000 for a joint account.