Money Market Funds vs. Bank Deposits: Which Offers Better Returns?

In the past year, Israeli money market funds yielded approximately 4% gross returns. These funds invest in short-term government bonds, bank deposits, and high-rated bonds with maturities up to 90 days, offering high liquidity that tracks the prevailing interest rates. Currently, the projected forward yield for these funds is around 3.25%, mirroring the general interest rate in the economy.

In comparison, one-year bank deposits offer up to about 2.85% in most major banks, though larger clients may negotiate slightly higher rates. Smaller banks, such as Jerusalem Bank and One Zero, offer slightly better rates, around 3.2% to 3.25% in some cases.

When choosing a money market fund, management fees are a critical factor, ranging from 0% to 0.25%. Given the similar yields, even small differences in fees become significant. Another consideration is the "addition rate," a type of entry penalty that can impact returns if the investment is short-term. The tax treatment also differs: bank deposits are taxed at 15% on nominal gains, while money market funds are taxed at 25% but only on real gains above inflation. With an estimated 1.5% inflation, a money market fund is generally more advantageous than a bank deposit, assuming current interest rate forecasts hold.

Experts suggest that money market funds are currently more attractive as they offer a hedge against potential interest rate increases, unlike fixed-rate deposits. While there have been recent interest rate cuts in Israel, global trends and potential future increases could make the flexibility of money market funds more appealing. The article advises investors to compare management fees, choose funds from reputable institutions, and be aware that fees can change over time, potentially impacting a fund's attractiveness.