The golden rule for choosing money-market funds is not to look at performance.
"The first thing to look at are the risk statistics, rather than the performance," says Paul Smith, manager of the Premier UK Money Market Fund. "Make sure it has never had negative periods and select your fund by looking for a stable net asset value and low volatility. If a fund is way above base rates over a shorter period such as one year, it must be taking excessive risk."
A good way to do this is look at the fund's annual returns rather than its cumulative returns, to ensure it is always positive, especially during times of high market volatility, such as in 2008.
Also, you should know what kind of assets the fund is holding, and understand what they are, how they work and the risks involved.
Mark Osland, director at independent financial adviser (IFA) Formula, suggests spreading your risk across more than one money market fund.
BlackRock Cash Fund takes a lower-risk approach and has protected against downside, as has Premier UK Money Market Fund. Henderson Cash and Invesco Perpetual Money have also made reasonable returns and protected against downside.
M&G High Interest is the best performer over the past year, but this is one for higher risk appetites as it is more volatile due to a more aggressive asset allocation. In 2008, for example, this fund made a negative return of just over minus 1 per cent.
