With a Stock Market Crash Looming, is Moving to a Money Market Fund a Good Option?
- Jun 25
- 6 min read
The biggest story this week impacting your finances is, without doubt, the news that the US and Iran have agreed to a peace deal which will reopen the Strait of Hormuz.
The prospect of the Strait of Hormuz reopening sent the price of oil tumbling, causing markets to reevaluate the outlook for inflation and interest rates.
But here is the reality of geopolitical events: by the time you read this, the situation could have shifted completely. Read to the end for the BREAKING NEWS...
In the meantime, low-cost global equity funds are hovering near all-time highs. This comes despite a consensus that markets are overvalued, a tech bubble may be forming, and economic uncertainties like sticky inflation and shifting unemployment numbers remain rife.
With a potential stock market crash on the horizon, many investors are asking: Is moving to a Money Market Fund a good option right now?
The Case for Money Market Funds Right Now
When the stock market starts looking shaky, the urge to retreat to high-ground safety is completely natural, but trying to time a market crash is one of the trickiest balancing acts in investing.
Moving into a Money Market Fund (MMF) is a classic defensive strategy, but whether it's the right move for you depends entirely on your time horizon and your stomach for volatility.
For long-term wealth building, it's Time in the Market, not Timing the Market. But, if you are going to need the money in the next 3 to 5 years, now may be the time to move to safety.
If you are 100% into Equities and can’t stand the heat, you can reduce your dependency on equities by moving to a portfolio balanced with Bonds, cash, or MMFs. The classic 60/40 portfolio may be more to your taste.
What do Money Market Funds Offer Right Now?
Attractive, Low-Risk Yields: Because the Bank of England is holding interest rates steady at 3.75%, sterling short-term money market funds (like those from Vanguard, Royal London, or Fidelity) are yielding a healthy 3.8% to 4.1%.
Capital Preservation: MMFs invest in ultra-short-term, high-quality debt (like Treasury bills and overnight bank deposits). They are designed to maintain a stable net asset value, making them incredibly safe compared to equities.
Liquidity: If a true market bubble pops, having money in an MMF means you have "dry powder" readily available to buy high-quality global index funds at a steep discount.
The Hidden Risks of Hitting the "Panic Button"
While shifting to an MMF protects you from downside, "all-or-nothing" market timing trips up even the most seasoned professionals for two major reasons:
The Cost of Missing the Best Days: To successfully time the market, you have to be right twice: you have to pick the exact right time to sell, and the exact right time to buy back in. History shows that the market's sharpest down days are often followed immediately by its biggest up days. If you are sitting in cash during those recovery bursts, your long-term returns take a permanent hit.
Market Bubbles Can Defy Gravity: A market can look overvalued or "bubbly" for months or even years before anything actually triggers a correction. If you move entirely to cash too early, you face the opportunity cost of missing out on residual growth.
Practical Strategies: How to De-Risk Safely
Instead of completely liquidating your portfolio, consider these measured approaches to balance your peace of mind with long-term growth:
The Tactical Cash Buffer: If you are currently drawing an income from your portfolio or know you will need cash in the next 3 to 5 years, shifting that specific portion into a money market fund makes excellent sense. It protects your immediate lifestyle from a market drop.
Diverting New Capital: Instead of selling existing stock allocations (which might trigger capital gains taxes if held outside an ISA or SIPP), you can direct all new monthly contributions into an MMF. This lets you build up a cash pile organically while leaving your core long-term investments alone.
Rebalancing Back to Targets: If a recent market run-up means your portfolio is heavily skewed toward equities (e.g., you went from a target of 80% equities down to 90% because stocks grew so fast), trimming the excess 10% and parking it in an MMF resets your risk profile without completely abandoning the market.
The Golden Rule: Long-term wealth building rarely requires guessing when the music will stop. If your investment horizon is 10+ years, market crashes generally smooth out into minor blips on a long-term chart.
Money Market Funds vs. Bank Savings Accounts: Risk and Fees
While both Money Market Funds (MMFs) and high-yield bank savings accounts are excellent places to park cash, they operate under entirely different mechanics:
A Savings Account is a traditional banking product where you lend your money to a single bank. A cash ISA is a savings account within a tax free wrapper.
A Money Market Fund (MMF) is an investment product where you buy into a diversified basket of ultra-short-term debt instruments.
Understanding how their risks and fees diverge is key to deciding where your money belongs.
1. Risk Breakdown: Which is Safer?
When you put money in a bank savings account, you are exposed to the risk of that specific bank failing. To mitigate this, the UK government provides the Financial Services Compensation Scheme (FSCS), which guarantees up to £120,000 per person, per banking institution.
MMFs are investments, meaning they are technically not guaranteed, and the value can theoretically drop (known as "breaking the buck”, an extremely rare, black-swan event**).
MMFs are structured to maintain a stable price (often utilising CNAV or LVNAV structures), aiming to keep the share price exactly at £1. Instead of relying on one bank, an MMF spreads your money across hundreds of ultra-safe instruments: UK Treasury bills, government overnight repos, and short-term debt from top-tier global banks.
If your investment platform (like Vanguard or Hargreaves Lansdown) goes bust, assets are ring-fenced and safe from the platform's insolvency. Also, the FSCS acts as a backstop up to £85,000 in the rare event of asset shortfalls or fraud.
**A Quick History Lesson: The two most famous instances of an MMF "breaking the buck" occurred in the US (The Community Bankers Mutual Fund in 1994, and the Reserve Primary Fund during the 2008 Lehman Brothers collapse). No major institutional UK Sterling MMF has ever broken the buck.
2. The Fee Structure: Direct vs. Hidden
Retail banks do not charge you a monthly fee to hold a savings account and provide you with an upfront guaranteed rate of return.
Because MMFs are investment products, you will pay a The Fund Fee (OCF) typically ranging from 0.10% to 0.15%, and a Platform Fee of 0.15% to 0.45%.
If an MMF has a gross yield of 4.10%, and your total combined fees are 0.25%, your actual net yield is 3.85%. You must subtract the fees to accurately compare an MMF against a bank's advertised headline rate.
Summary Verdict
• Choose the Savings Account or cash ISA if: you want absolute certainty backed by a government guarantee, prefer fixed rates, and don't want to calculate platform fees.
NOTE: If you wish to change from a stocks and shares ISA to a cash ISA, do not withdraw the funds to your bank account, as it will lose its tax-free protection. First, sell the equity to cash within the ISA, then ask your chosen cash ISA provider to transfer the funds across.
• Choose the Money Market Fund if: you already have cash sitting inside a SIPP or ISA platform and want to earn a competitive yield without liquidating your tax wrapper.
Changes to ISA rules from April 2027
Changes for investors under age 65:
The amount that can be paid into cash ISAs each tax year will reduce from £20,000 to £12,000.
Transfers from a stocks and shares ISA to a cash ISA will no longer be allowed.
Changes affecting all investors:
Interest paid on cash held in a stocks and shares ISA will be subject to a 22% charge.
Money market funds can continue to be held within a stocks and shares ISA and not be subject to a 22% charge, provided they do not make up 100% of the investments.
We’re awaiting details on how some of these changes will apply in practice and will share further information as it becomes available.
Thanks gradragtoriches, time to move to MMF?