What is better - a deposit or a money market fund?

In the last 12 months, money market funds yielded about 4% gross. These funds invest in MAKAM (short-term treasury bills), short-term bank deposits, and high-rated bonds with an average duration of up to 90 days — highly liquid channels whose yield tracks the actual interest rate. At current prices, and given that the funds receive good interest rates thanks to their size, the expected forward yield stands at about 3.25%, similar to the interest rate in the economy. In contrast, one-year bank deposits offer up to about 2.85% in most banks, although large clients and those who negotiate will receive a bit more. In small banks — Jerusalem and One Zero — it is possible to receive about 3.2%–3.25%, and in some cases, it is also possible to receive a higher amount.

How to choose a money market fund?

All funds play in the same narrow field without much room or ability to generate yield. Therefore, the determining parameters are relatively technical. Management fees are the first parameter. The range varies from 0% to about 0.25%, and when yields are almost identical, every tenth of a percent becomes significant. Another similar parameter is the entry fee — there are funds that charge an entry fee, which is a penalty upon entry that effectively requires you to invest over time, otherwise this penalty becomes very significant relative to the yield.

So why does it exist at all? Imagine you are given zero management fees and an entry fee of 0.5% — is it worth it? The alternative management fee for the sake of the example is 0.25%, so someone who invests for over two years will prefer the entry fee. Otherwise, the fund with the management fee is preferable. In any case, one must track the management fees because it is a trap. Entities offer very low management fees because that way their yield will be better and you will come to them, but after a period they raise the management fees.

There is also a difference in taxation — on a deposit, you pay 15% tax on the nominal profit. In a money market fund, you pay 25%, but only on the real profit — what remains above inflation. This advantage depends entirely on the level of inflation. With inflation of 1.5%, expected in the coming year, a deposit yielding 3% will leave a net of about 2.55%. A fund that yields 3.25% will generate a real profit of 1.75%, the tax on which is 0.43%, and the net — about 2.82%. The money market fund is preferable unless you receive more on the deposit. This is a calculation that refers to the assumptions existing now.

If the interest rate drops at a pace significantly different from the assumptions, then there is a risk that the money market fund managers will not succeed in generating this yield, but after the recent interest rate reduction and given that the interest rate is rising globally, it seems that future reductions will be very gradual and slow.

In recent months, estimates have risen globally that the interest rate will rise, and although the trend here is downward, this could delay the expected reduction for the future. Hence, a money market fund is actually more attractive because it provides insurance in case the interest rate rises — the money market fund is linked to what happens in the market and does not fix the interest rate. Beyond that, even if the existing forecast comes true, it is a reduction of about a quarter of a percent in a range of 9 to 12 months, not a move that will affect the attractiveness of money market funds.

In the attached table, all the information is found to understand which money market funds are attractive. The test of management fees is especially important, and it is also worth choosing a fund from a known entity with reasonable yields. Also, it is important to remember that management fees may change. Purchasing a fund with low management fees now can be worthwhile, but in quite a few cases, it stems from the desire of fund managers to generate cash flow, and when there is big money, management fees become more expensive and attractiveness decreases.