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Is cash king or are stocks on top?

08 September 2023

Investors are turning to money market funds, but stocks may still be the way to go.

By Jonathan Jones,

Editor, Trustnet

Cash savings have made a heroic comeback over the past 12 months as rising interest rates lifted the returns available from fixed-rate and easy-access savings accounts to levels not seen in more than a decade. But the phenomenon is so much bigger than I thought.

Statistics from Trustnet shows funds in the Investment Association's money market sectors climbing the rankings in terms of pageviews, indicating that more of our audience is looking at these low-risk portfolios.

It is the first time in my almost 10 years in this industry that the sectors have even been remotely close to investors’ radars, let alone among the most watched asset classes.

Further evidence of the rise of cash came from Fidelity Personal Investing this week. Of the 10 most-bought ISA funds across its platform in August, three were cash funds. The same was true of self-invested personal pension (SIPP) picks.

Fidelity’s Graham Smith said: “Following recent increases in central bank interest rates, money market funds now offer an appealing combination of safety and income. They make sense as a port in a market storm, or as a parking place while other investment decisions are being made (switching into other types of funds or shares is straightforward)."

It is easy to understand why. Fidelity Cash and L&G Cash Trust – two of the three most bought funds in August across both ISAs and SIPPs – pay a current yield of 5.08% and 4.7% respectively.

This is akin to the long-run average return from stock markets over the past 100 or so years – although shares have made much more in the more recent past.

Having recently made changes to my own portfolio, I toyed with the idea of moving into cash savings options rather than a stocks and shares ISA.

For those who have locked in fantastic rates, such as National Savings & Investments’ (NS&I’s) market-topping 6.2% rate, the returns on offer are very strong indeed and almost parallel with UK inflation, which stood at 6.4% in July, according to data from the Office for National Statistics (figures for August will be out later this month).

However, investors should not forget to take some risk. In the second quarter of the year, equity exchange-traded funds (ETFs) attracted $89bn as the S&P 500 index returned 8.7% in just three months, mostly driven by large-capitalization technology stocks and the increased interest in artificial intelligence (AI), according to data from Vanguard.

What is clear is that investors and savers are making moves now, whether that be to lock in rates or to increase their allocation to the stock market.

Both moves are understandable if of the belief that interest rates will rise slowly – or perhaps not much more at all – from here.

As for me, I will stick with my fund picks – the majority of which are invested in stocks. I prefer having the potential for higher gains, even if a circa 6% yield is certainly one to seriously consider.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.