Bank or Provident Fund: Where Should You Manage Savings for Every Child?
The choice between bank savings and a provident fund can significantly affect the amount accumulated for a child over 18–21 years of saving. This page compares the stability of bank savings with the growth potential of a provident fund, reviews the different investment tracks, and explains what changes can be made along the way.
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One of the most important decisions in the “Savings for Every Child” program is where the money will be managed: in a bank or a provident fund. On the face of it, this is a small decision—after all, it is only a few dozen shekels a month. But in practice, because this is long-term savings of 18–21 years, this choice may significantly affect the amount the child receives in the future.
Over the years, savings through provident funds invested in the capital market have generally generated higher returns than bank savings at Ribit Kvu'a (ריבית קבועה)A fixed interest rate; however, if the loan is index-linked, the debt will change according to inflation.. This is also one reason why the state's current default for those who did not choose a track is a provident fund in an increased-risk track—based on the view that over the long term, there is greater potential for the money to grow.
What is the difference between a bank and a provident fund?
Savings in a bank
When choosing savings in a bank, the money is deposited into a savings track with interestThe "price of money" – the amount paid for the use of someone else’s money, as income to the depositor or as a cost to the borrower. set in advance (fixed or variable, depending on the track).
- The main advantage: greater stability and less volatility.
- What this means: the money is not invested in the capital market and therefore is generally not affected by sharp rises and falls in the markets.
- The main disadvantage: the money's growth potential is usually lower. In other words, you get more stability but generally less growth potential.
Provident fund
In a provident fund, the money is invested in the capital market—in stocks, bondsA type of "loan" that an investor provides to a government or company in exchange for repayment of the principal plus interest., and other financial assets—according to the selected investment track.
- The main advantage: over long periods, the capital market has historically generated higher returns than bank savings, so such savings have the potential to accumulate to significantly higher amounts.
- The main disadvantage: there will also be periods of declines, volatility, and sometimes less favorable years. In other words, you get more growth potential but with greater volatility along the way.
Here is a quick comparison to clarify the differences between the two options:
Quick comparison of the two options
| Feature | Bank | Provident fund |
|---|---|---|
| Nature of savings | Interest known in advance | Capital market investment |
| Volatility | Low | May be high |
| Long-term return potential | Usually lower | Usually higher |
| Investment tracks | Limited | Wide variety |
| Switching between providers | Limited | Can be transferred and switched |
| Who is it suitable for? | Those who prefer stability over returns | Those willing to tolerate volatility for higher returns |
Why did the state choose a provident fund as the default?
In the program's early years, parents who did not choose a track were assigned a Bank depositA bank savings product in which a sum of money is "locked" for a defined period in exchange for a predetermined interest rate. by default. Over the years, after it became clear that historically, savings in a provident fund in an increased-risk track would generate significantly higher returns than bank savings—sometimes even 3 times as much over time—the state changed the default to a provident fund in an increased-risk track.
Why did this happen?
Because the program is a very long-term savings plan, and the assumption is that over two decades it is possible to better withstand temporary volatility along the way in order to benefit from greater growth potential over time. This does not guarantee returns, but reflects the view that over the long term, the capital market may be more suitable for this type of savings.
Provident fund investment tracks
If you choose to manage the savings in a provident fund, you will need to choose an investment track. There are tracks at different risk levels, alongside dedicated tracks tailored to certain populations:
- Low-risk track: a track with lower exposure to stocks and more conservative investments. Its volatility is generally lower—but its long-term growth and return potential also tend to be lower.
- Medium-risk track: a track that combines stocks, bonds, and more conservative investments. Its purpose is to create a balance between growth potential and the level of risk and volatility.
- Increased-risk track: a track with greater exposure to the capital market and stocks. Over the years, tracks of this type have historically generated higher returns—but it is important to understand that they are also more volatile and sometimes include significant declines along the way.
- Dedicated tracks: in addition to the general tracks, there are also dedicated tracks such as a Halacha track (adapted to Halachic investment principles) or a Sharia track (adapted to investment principles in accordance with Islamic law).
Can you change tracks later?
Yes. If the money is managed in a provident fund, you have considerable flexibility and can take the following actions at any time:
- Switch between different investment tracks and change the risk level along the way (for guidance)
- Switch between managing providers (different provident fund companies)—decide which provider you want to transfer the money to, and they will guide you on how to transfer it.
For example
Some parents choose a track with greater exposure to the capital market when the child is young—and later reduce risk as the child approaches age 18. This is one reason a provident fund provides greater flexibility over time.
Which is actually better?
When it comes to savings over 18–21 years, there is a strong argument in favor of a provident fund because, over the years, the capital market has historically generated higher returns than bank savings. Therefore, for many families, and following the state's change in default, a provident fund has become the more natural choice.
However, it is important to understand that such savings will also have less favorable years and sometimes sharp declines along the way. If you choose a track invested in the capital market, it is important to take a long-term view of the savings and not be alarmed by temporary volatility.
Guide: How to Check Where Your Child's Savings Are Held
We have prepared a detailed guide on how to find your child's savings plan.
Guide: How to Double the Savings Amount in the Savings for Every Child Program
We have prepared a simple guide explaining how to add an additional amount from the child allowance to the plan, thereby doubling the monthly deposit and significantly increasing the savings available to the child in the future.
Guide: How to Change Your Child's Savings Track in a Provident Fund
We have prepared a simple guide explaining how to check which track your child's savings are managed under and how to switch to another track that better suits your preferences.
The bottom line,
The financial difference between the two options comes down to how you manage risk: if peace of mind and knowing the exact amount at any given time are critical to you, the bank is the right choice. Conversely, if your goal is to leverage the long time horizon of the next two decades to maximize the amount the child receives, a provident fund (especially in equity-oriented tracks) provides the strongest growth engine, despite the volatility along the way.
Frequently asked questions
Can you switch from a bank to a provident fund?
Yes, but only for new deposits. The rules have changed over the years, so it is important to check what is possible based on when the savings were opened and the track in which they are managed. We will elaborate on this on the next page.
Is a provident fund risky?
A provident fund in tracks with high exposure to the capital market can be volatile, but over long periods, the capital market has historically delivered higher returns than bank savings. This does not guarantee future results.
Is it advisable to choose a higher-risk track?
Many choose it because of the long investment horizon, but it is important to understand that there will also be periods of declines along the way.
If I did not choose anything, what happens to the money?
The money will be deposited automatically according to the default track set by the state at that time. Today, this default is a provident fund in a higher-risk track.
In summary,
The decision of where to manage the Savings for Every Child plan may significantly affect the amount accumulated over the years. Bank savings offer greater stability. A provident fund offers higher growth potential, alongside greater volatility along the way. Over the years, especially in long-term savings, many prefer a provident fund—and this is also the option the state currently directs people toward as the default.
The most important message is simple: with savings spanning nearly two decades, it is important to think not only about the stability of the coming year, but also about the potential of the years ahead.