In late 2010, money market funds came under Financial Services Authority scrutiny. The regulator was concerned that the naming of these funds could be misleading investors - many described themselves as cash funds yet were invested in esoteric, high-risk investments. When the downturn hit, their performance suffered and those who thought they'd played safe were left nursing substantial losses.
Such was the uproar that Fidelity, which offers one of the largest and longest running money market funds, considered renaming the Fidelity Cash Fund so as not to fall foul of the FSA. But the £229m fund - which was not among the credit cruch culprits - has retained its name and remains a popular choice for investors looking to reduce risk in their investment portfolio and steer clear of stock market volatility. Those nearing retirement, for example, often choose to transfer their pension fund into a money market fund as a way of 'de-risking'.
According to Fidelity, the Cash Fund offers a high level of security and easy access to investor money. It has been given the highest AAA rating by independent rating agency Moody's.
The fund's investment objective is to maintain capital value while producing income via a portfolio of diversified money market instruments, other short-term investments and transferable securities. While the value of investments will be adversely affected if any of the institutions with which the cash is deposited suffers insolvency or other financial difficulty, the attraction of a money market fund is that it spreads the risk across a number of financial institutions whereas a cash deposit account is typically only backed by the one financial institution holding the deposit.
Over a five-year period the Fidelity Cash Fund is the top performer in the IMA's Short Term Money Market sector, and ranks among the top five funds over three years. However the fund's yield is below the base rate at 0.23 per cent and of the lowest of its peers. This is largely due to the low-risk approach adopted by the fund's manager, Tim Forester. This approach should, however, provide a genuinely safe haven for those looking to preserve capital over shorter time frames.
For those with over £5,000 invested in the Fidelity Cash Fund, additional banking activities are provided through Clydesdale Bank. That allows investors to operate a cheque book on their Fidelity Cash Fund which can be used for withdrawals of £250 or more. They can also apply for an ATM card which allows them to withdraw up to £350 a day from any Link cash machine in the UK.
A major drawback is that you can not hold this fund within an Isa, as it can only be held as an unwrapped fund. However, Fidelity does offer a cash reserve account for Isa holders to park cash with the intention of investing this later.
Source: Investors Chronicle funds data & Fidelity
Performance figures as at 11 June 2012
Top long positions (as at 30 April 2012)