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

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.

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. 

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.