There are a number of ways of holding cash. The most obvious is through bank and building society accounts, including online. You should always shop around for the best rate of interest on accounts on a regular and ongoing basis, as they vary over time in their relative attractiveness. Notice accounts obviously tend to offer a higher rate than no notice accounts. Since the 2008 financial crisis, interest rates have remained low. Any increase in the near future is likely to be small, so returns on cash remain negligible.
If you are holding cash for the long term, wealth managers may suggest you consider investing in money market funds in an attempt to enhance your rate of return. Money market funds have largely been the preserve of institutional investors. They are collective investments that invest in short-term debt instruments. They offer benefits of diversification and have daily trading. This allows investors to redeem money without prior notice for withdrawals. They do not, however, offer the same depositor protection as a bank account.
There are two main types of money market funds constant net asset value and accumulating net asset value. In the former, investors receive income on a daily basis. This can be paid out to the investor, or used to buy more units in the fund. In accumulating net asset value "or roll-up" funds, income is not distributed, but the value of the fund shares increase accordingly.
AAA rated money market funds are designed to achieve their primary aim of preserving capital and protecting income, by limiting exposure to shifts in interest rates. Within these criteria, money market funds can invest in certificates of deposit, commercial paper, floating rate notes, repurchase agreements and time deposits.
It is also possible to invest in so-called enhanced cash funds, some of which are not AAA rated. These funds aim to generate a higher return by investing in longer dated paper or by going down the credit rating.
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