Cash funds

greenwich

One or two people have said here recently that they have opened dozens of savings accounts in the last year, chasing the best interest rate. I don't have whatever it takes to do that but it reminded me that about 10 or 15 years ago some investment firms started unit trusts called cash funds. The idea was that they would invest your money in interest-bearing accounts rather than shares. They would charge 0.5% per year but, because they could get higher interest rates on the money markets than you or I, and move the money around very quickly, we'd still be better off than if we had stuck the money in an interest-bearing account ourselves.

I haven't seen these advertised for a while. Do they still exist? I suppose a low risk corporate bond fund might be almost a substitute for cash funds, but I'd like to know what happened to them.

dunstonh

Cash funds exist but they have limited use apart from people using them as a holding fund whilst they move money around. Cash funds should not be considered as a replacement for savings accounts. It isnt what they are designed for and they are unlikely to give you what you can get in a savings account.

Coporate bonds, gilts, fixed interest and commercial property all fall in a similar risk range but are one step higher up the risk range* than cash funds. They still exist and are used extremely heavily in most decent portfolios and do offer better potential to beat savings accounts.

*note some funds in these areas may include investments that can move them even higher so its not safe to assume that they are all low risk or low/medium

greenwich

Sorry, after posting above I remembered that Fidelity used to have a cash fund and still does. I have just checked its performance and found it has returned 3.5% in the past year. That is just shocking. How can a professional fund manager perform that badly? Even after deducting a 0.5% charge, you and I could have done better just by saving the money with Yorkshire BS (in fact, that's exactly what I have done). I wouldn't have believed even Fidelity could be so incompetent.

deemy2004

LOL... its a cash fund, so they invest in cash deposits which don't pay much interest hence the low return.

Yes, off course you will get better in an individual savings account which does not carry management charges and offcourse you have the ISA option on top ! to further maximise interest.

I don't know the breakdown of the fidelty fund, i.e. whether its all deposited in sterling, though I doubt they would deposit in other currencies as that would mean a much more volatile and risky fund.

Fidelty are more than happy to rake thier 0.5% return... for not doing much..

greenwich

deemy2004 wrote:

LOL... its a cash fund, so they invest in cash deposits which don't pay much interest hence the low return.

You missed the point. The YBS were until recently paying 5% on an instant access non-ISA savings account; even now they're paying 4.75% on it. So a cash fund that returns 3.5% really is deplorable.

dunstonh

Many of them are getting around 4-4.5% before charges.

You need to look at the purpose of cash funds. They are not there to attract savings account money. They are there to hold funds between transactions, which may have a short delay or place profits pending a withdrawal that may be coming in the near future or for someone wanting to sit out of the market for a short period before moving back in.

They are not competing with savings accounts so there is no reason for them to be priced as such.

deemy2004

greenwich wrote:

You missed the point. The YBS were until recently paying 5% on an instant access non-ISA savings account; even now they're paying 4.75% on it. So a cash fund that returns 3.5% really is deplorable.

Its a market place... there are savings accounts out there with millions in them that pay less than 1% !

Also with accumulation units you would be liable to capital gains tax rather than income tax... or so I assume..

Now don't get me wrong - I don't have a penny in a cash fund for obvious better returns elswhere reasons.

greenwich

OK, I may be out of date. I am sure that when they first came out they were being marketed as substitutes for building society accounts, on the ground that the managers could use their muscle to get high money market rates and move money around daily if necessary. If they've changed their purpose to become short stay car parks for money then that explains why they are not marketed much.

BTW, there is no tax advantage in having accumulation units. The income is still deemed to have been distributed to you for tax purposes and must be declared as income on your tax return.

deemy2004

greenwich wrote:

BTW, there is no tax advantage in having accumulation units. The income is still deemed to have been distributed to you for tax purposes and must be declared as income on your tax return.

Well then even more reason to avoid them

JEC

dunstonh wrote:

Many of them are getting around 4-4.5% before charges.

You need to look at the purpose of cash funds. They are not there to attract savings account money. They are there to hold funds between transactions, which may have a short delay or place profits pending a withdrawal that may be coming in the near future or for someone wanting to sit out of the market for a short period before moving back in.

They are not competing with savings accounts so there is no reason for them to be priced as such.

So, is it possible for me to transfer money currently in a Stocks ISA into one of these cash funds, still within the ISA, and then move it into another fund, again still within the ISA?

Thanks in advance.

dunstonh

So, is it possible for me to transfer money currently in a Stocks ISA into one of these cash funds, still within the ISA, and then move it into another fund, again still within the ISA?

Correct. The only thing you need to be wary of is how you do it. If done with a discount IFA and some direct providers, it would be either nil cost or have a small cost to switch funds. If you do it through a bank or other distribution channel that is full cost, then you could lose upto 5% on each switch.