Does income from cash funds beat the Bank of England rate?

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. 

Investment funds which aim to produce a cash-like return have been growing in popularity ever since interest rates began to rise at the start of 2022. 

Rates eventually peaked last summer and have declined since then, but cash still remains attractive to many because returns remain comfortably above inflation, meaning money held in cash gains value in real terms.  

That’s a big change from most of the period since the financial crisis, when rates were low and savers watched the value of their money eroded by price rises that weren’t matched by the interest they were getting. 

The reemergence of cash as a worthwhile home for your money triggered the interest in ‘cash funds’ - investment funds which use short-dated bonds and loans with the aim of producing a return very similar to the interest available on cash. These funds can be bought on some investing platforms - including Fidelity - and can be held in a Stocks & Shares ISA.

• Find out more about Fidelity’s Stocks & Shares ISA

They might call themselves ‘money market funds’ or even ‘cash funds’ but there are important differences between these and savings accounts.  

These funds do not pay an advertised rate of interest - like a savings account - but do regularly distribute the income they generate, producing a yield. Fund providers publish an annual percentage yield figure to indicate the level of income that is due to be paid in the future.  

That compares to cash accounts where the savings provider will advertise an interest rate. Many accounts guarantee that rate for a period of time - although not all do and many will warn that the interest you get can fall. It’s also usual for the highest paying savings accounts to include an element of interest that falls aways after a period, or is taken away if withdrawals are made outside of set limits.  

On the face of it, money held in cash savings accounts can’t fall in value (although it can be eroded by inflation). Money in cash funds is usually subject to a small charge to invest which means it is technically possible for investors to lose money if the assets held in the fund produce insufficient income. 

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The chart below shows a comparison between the annual yield from the Fidelity Cash Fund - a popular cash fund option - and the Bank of England base rate of interest.

You can see how returns from the cash fund are closely aligned to the Bank of England rate, lagging it for short periods before catching up, and occasionally jumping above it. 

While not directly linked to movements in the Bank of England rate, they do tend to correlate with it. The rates you see on cash savings are set by account providers who compete with each other to win savers’ deposits.  

• Read more on how far interest rates will fall.

The Bank of England recently lowered interest rates to 4.25% and savings interest is expected to follow suit. Meanwhile, the expected yield on the Fidelity Cash Fund sits at 4.96% of income in the coming year - or 4.61% after deducting the Fidelity platform charge of 0.35%. Please note this yield could go down or up and is not guaranteed.

• Read: Why are investors buying money market funds?
• Read: Top 10 best-selling ISA and SIPP funds in April
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