Cash is king this ISA season - but what else do investors like?

Investors took advantage of higher interest rates, adding money market funds and individual gilts to their ISAs in January. Tracker funds and UK income also proved popular. Here’s where investors are putting their money this ISA season

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(Image credit: Dowell)

Investors are taking advantage of the higher interest rate environment this ISA season, adding lower risk investments like money market funds and individual gilts to their portfolios.

According to investment platform AJ Bell, the most popular funds bought on its platform in January include money market funds, which have made it into the top ten. 

These include the Royal London Short Term Money Market fund, the Lyxor Smart Overnight Return ETF, and the Vanguard Short Term Money Market fund. 

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While the interest investors can earn on cash savings has dipped slightly since its peak, it remains compelling. If you’re willing to lock your money away for a year, you can currently earn up to 5.16% in the best one-year fixed savings accounts

Meanwhile, if you are looking to lock this income in for longer before rates fall, you can currently earn up to 5.10% on a two-year fixed account, or up to 4.60% on a three-year fixed account.

“Investors probably find these assets appealing because they are low risk, yet offer respectable returns, far in excess of what they were paying just over a year ago”, says Laith Khalaf, head of investment analysis at AJ Bell.

The interest you can earn on money market funds and short-term bonds has already dipped from its peak, as markets have begun pricing in cuts to the base rate later this year.

The Bank of England held interest rates at 5.25% at its February MPC meeting for the fourth consecutive time, with one committee member voting for an immediate cut to rates. It was the first time a committee member had voted this way since 2020.  

Despite this, the income you can earn from cash investments still remains dramatically higher than its long-term average, if you look back over the period since 2008. 

“Given the long spell investors endured with near-zero interest rates, we expect the popularity of bonds and money market funds to be an ongoing theme as we progress through the ISA season”, Khalaf added.

As well as cash, where else are investors pumping their money as we approach the end of the tax year?

The trend towards tracker funds

As well as veering towards cash, investors opted for passive funds in their ISAs in January. 

The top ten funds on AJ Bell’s platform over the course of the month were all tracker funds, with the exception of the money market products. 

This points to an ongoing trend, with investors increasingly opting for the simplicity and lower fees these funds can offer. 

“This seems to be pretty par for the course nowadays, and while active funds still make up the lion’s share of industry assets under management, fresh fund sales are full to bursting with index trackers”, said Khalaf.

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Top 10 funds on AJ Bell in January
Royal London Short Term Money Market
Fidelity Index World
iShares S&P 500 ETF
Lyxor Smart Overnight Return ETF
Vanguard S&P 500 ETF
HSBC FTSE All World Index
Vanguard LifeStrategy
Vanguard £ Short Term Money Market
Vanguard FTSE Global All Cap Index
Vanguard FTSE All-World UCITS ETF

Despite challenges in the sector, with valuations currently at low levels, the UK finance sector has remained popular with investors looking to add some decent income into their ISA.

Legal & General, Aviva, Phoenix Group, Glencore, Barclays, Lloyds and M&G all featured in the top ten shares bought via AJ Bell’s platform in January.

“These companies do tend to offer pretty high dividend yields thanks to their lowly valuations”, said Khalaf. While these aren’t expected to improve dramatically any time soon, “at least investors are being paid for patience”, he added.

Katie Williams
Staff Writer

Katie Williams has a background in investment writing and is interested in everything to do with personal finance, investments, and financial news. Before joining the MoneyWeek team, Katie worked as an investment content specialist at Invesco EMEA, a global asset management firm, which she joined as a graduate in 2019. While there, she enjoyed translating complex topics into “easy to understand” stories. She studied English at the University of Cambridge and loves reading, writing and going to the theatre.