Is Vanguard short term money market fund a sensible place to put money required in two months?

dharm999

Need my Vanguard ISA money to purchase a house on two months time, so intend to convert from equity funds to a short term money market fund, is that the best place to put it to minimise the risk of capital loss, or should I just transfer the money to a cash ISA instead?

Thanks

Keep_pedalling

Low risk is not no risk, so not really.

masonic

Another risk to avoid is not being able to access the money when needed. Funds may be gated or suspended from trading in certain situations. A cash ISA provider is not permitted to prevent you from withdrawing your money. Though you cannot escape the risk of anti-money-laundering hold-ups.

Beddie

An STMM fund is very low risk indeed, much lower than equity funds. But yes, for absolute surety, cash ISA is a better bet. Even better is an account with your main bank, so you know you can transfer the money into your current account straight away when needed. 

boingy

There is not much to be gained by using an STMM for such a short period of time. You might as well stick it in one or more EA savings accounts and get a very similar rate.

OldScientist

One risk associated with money market funds is liquidity risk. This might occur if there was a sudden drop in interest rates (e.g., like in 2008) and holders of STMM rushed to sell. Vanguard's fund (see https://www.vanguardinvestor.co.uk/investments/vanguard-sterling-short-term-money-market-fund-investor-gbp-income-shares/portfolio-data ) has a weighted maturity of 39 days, while 57% of their holdings have a maturity of 1 month or less and 24% one week or less. In other words, even if Vanguard were forced to sell, over half the holdings would be sold with potentially only a small loss. I do note that the 3% of current holdings with maturities between 3 and 6 months would be more likely to incur a larger loss if sold before maturity. It is also worth noting that over 50% of the Vanguard fund is currently invested in safe UK Treasury Bills.

A longer description of the risks can be found at https://monevator.com/money-market-funds/

FWIW, we are currently holding about 20% of our house fund in STMM, but do have a slightly longer timescale than you (~6 months).

From a practical point of view, transferring the amount depends on how much you are talking about. If less than £20k that is fairly instant, but doing an ISA to ISA transfer might take longer (there are a few horror stories on these boards, although largely ISA S&S to ISA S&S rather than ISA S&S to ISA cash). Withdrawing and placing in a non-ISA cash account might incur tax on the interest (again depending on the amount), but this is probably a secondary concern compared to liquidity and capital preservation.

GeoffTF

OldScientist said:

In other words, even if Vanguard were forced to sell, over half the holdings would be sold with potentially only a small loss. I do note that the 3% of current holdings with maturities between 3 and 6 months would be more likely to incur a larger loss if sold before maturity. It is also worth noting that over 50% of the Vanguard fund is currently invested in safe UK Treasury Bills.

There is no secondary market for Treasury Bills, and the same applies to other investments held by the fund. Vanguard would have to wait for them to mature. If enough investors in the fund want their money quickly the fund would have to be gated.

OldScientist

GeoffTF said:

OldScientist said:

In other words, even if Vanguard were forced to sell, over half the holdings would be sold with potentially only a small loss. I do note that the 3% of current holdings with maturities between 3 and 6 months would be more likely to incur a larger loss if sold before maturity. It is also worth noting that over 50% of the Vanguard fund is currently invested in safe UK Treasury Bills.

There is no secondary market for Treasury Bills, and the same applies to other investments held by the fund. Vanguard would have to wait for them to mature. If enough investors in the fund want their money quickly the fund would have to be gated.

Yes you're right, that according to the BoE, "the secondary market in Treasury bills has in recent years become illiquid" and this would therefore limit how quickly the fund could sell assets and, therefore, remains a risk.

dharm999

OldScientist said:

From a practical point of view, transferring the amount depends on how much you are talking about. If less than £20k that is fairly instant, but doing an ISA to ISA transfer might take longer (there are a few horror stories on these boards, although largely ISA S&S to ISA S&S rather than ISA S&S to ISA cash). Withdrawing and placing in a non-ISA cash account might incur tax on the interest (again depending on the amount), but this is probably a secondary concern compared to liquidity and capital preservation.

I’m looking at a total of c£550k, between myself and the OH.  Given that people have highlighted problems transferring an ISA from Vanguard, I may decide to not transfer to a cash ISA as I don’t want there to be a problem accessing the money when I need it.

Hoenir

Low coupon short dated Government Gilts would be an option. Buy direct. No issues with liquidity. 

masonic

Hoenir said:

Low coupon short dated Government Gilts would be an option. Buy direct. No issues with liquidity. 

Not at Vanguard though, and if an ISA transfer is to be avoided, taxable savings accounts may be worth considering. T24 looks to be the only option and that last taxable coupon will make up most of the return.