Money market fund: the modern alternative to a deposit
A money market fund is a solid and liquid investment channel that lets money work without locking it for a fixed period as in a bank deposit. This page explains how the fund works, its advantages and disadvantages, taxation, and how it compares with a deposit and Makam.
- Reading time
- 7 minutes
- Last updated
Money market funds are a type of mutual fundAn investment vehicle that allows many investors to pool their money into a shared portfolio of assets managed by a professional. designed for people looking for a safe “parking place” for money. They are managed by professional investment managers under the close supervision of the Israel SecuritiesA general term for a tradable financial asset (such as a share, bond, or unit in a fund) that represents a right to an asset or to profits. Authority and invest in very solid assets (such as large bank deposits and Makam"Short-Term Loan" – a one-year government bond that serves as a relatively low-risk investment instrument. (מק״מ).
In a world of rising 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. rates, the money market fundA mutual fund that invests in low-risk, short-term assets and serves as a liquid alternative to a bank deposit. has become one of the strongest alternatives to 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for a predetermined interest rate., thanks to its combination of liquidityThe speed and ease with which money can be withdrawn from an investment and converted into cash in a bank account without significant penalties. and tax advantages.
The advantages: why is everyone talking about it?
- Full liquidity: Unlike a deposit in which the money is “locked,” money can be withdrawn from a money market fund on any trading day.
- Significant tax benefit: In a deposit, you pay tax on every shekel you earned. In a money market fund, you pay tax only on the real profitThe actual gain remaining from an investment after deducting the rate of inflation. (what you earned above inflationA process of general price increases that reduces the purchasing power of money (the same amount of money buys fewer products).). If prices rose by the same amount as the interest—not a single shekel of tax will be paid.
- Savings on fees: At most banks, there are no custody fees or purchase/sale commissions on money market funds (it is worth checking this in your account!).
- Flexibility: You can invest almost any sum in a money market fund, small or large. Usually there is no need for a high “minimum amount” to receive a good interest rate.
- Solid investment: The fund invests in short-term, low-risk assets and is therefore considered one of the most solid investment instruments in the capital market.
The disadvantages: what is the risk after all?
- No guaranteed interest: Unlike a deposit in which the interest rate is fixed in advance, here the returnThe profit (or loss) from an investment over a certain period, usually expressed as a percentage of the original amount invested. changes according to interest rates in the economy and the fund’s performance.
- Management fees: A money market fund has management fees, which are usually very low—but they still exist and affect the net return over time.
- Not a long-term solution: This is a tool for preserving the value of the money, not for accumulating significant capital over decades.
Table—advantages and disadvantages of a money market fund
| Aspect | Advantage | Disadvantage |
|---|---|---|
| Risk level | Low | The risk is not zero |
| Return | Higher than a deposit (usually) | Not guaranteed |
| Liquidity | Very high (daily) | Depends on a trading day |
| Tax | Real (only above inflation) | — |
| Management | Simple | Requires an investment account |
The bottom line: a money market fund in a nutshell
- What it is:
- A very solid investment fund that holds short-term, low-risk assets.
- What it is not:
- A closed bank deposit or an investment that guarantees a fixed return in advance.
- Who it suits:
- Money you need for the short term and want to keep liquid and available.
- The main advantage:
- High liquidity and returns that are usually higher than those of bank deposits.
- The main disadvantage:
- There is no commitment to a fixed interest rate, and the value may change slightly according to market conditions.
Frequently asked questions
Is a money market fund suitable for any sum of money?
Yes. Relatively small sums can also be invested.
How do you invest in a money market fund?
To begin, you need a securities account (at a bank or investment house). After choosing the fund, you need to enter the investment amount and approve it.
It is important to know: Under Bank of Israel regulations, banks are prohibited from charging management fees, custody fees, or purchase and sale commissions on money market funds. Therefore, it is usually more worthwhile to buy them directly through the bank.
How quickly can the money be withdrawn (liquidity)?
The fund trades once a day, so the instruction will be executed that day or on the next business day. In most funds, you can sell the units and receive the money in your account within one business day.
Is it risky? And what does the fund invest in?
A money market fund is considered one of the most solid instruments in the capital market. It invests in safe assets such as:
- Short-term bank deposits: Short-term bank deposits.
- Makam: One-year government bonds.
- Highly rated corporate bonds: Loans to strong and stable companies.
Please note: Because this is an investment product, very slight fluctuations in the fund’s value may occur.
Can you lose money in a money market fund?
Theoretically, yes, because it is an investment product. In practice, because of the nature of the assets (short and solid), volatility is negligible. It is the closest thing to “safe” that the capital market has to offer.
How does taxation work? (The real advantage)
A 25% tax is paid on profits in a money market fund, but the major advantage is that the tax is real. That is, you pay only on the profit created above the rise in the index (inflation).
In simple terms:
- If the fund rose by 3% and inflation was 3%—you will pay no tax at all.
- If the fund rose by 4% and inflation was 3%—you will pay tax only on the excess 1%.
A short example: If NIS 10,000 was invested in a money market fund and by the end of the period the investment’s value rose to NIS 10,300—the nominal profit is NIS 300. If inflation during the same period was 3% (meaning a price increase of approximately NIS 300), the real profit is zero—and therefore no tax will be paid.
On the other hand, if the investment’s value rose to NIS 10,400, a real profit of NIS 100 above inflation would have been created. In that case, tax would be paid only on the real profit—25% of NIS 100, meaning NIS 25.
Comparison between a money market fund and a bank deposit
| Feature | Money Market Fund | Bank Deposit |
|---|---|---|
| Expected profit | Usually higher, but not guaranteed | Known in advance, but usually lower |
| Taxation | 25% on the real profit (above the index) | 15% on the nominal profitThe "raw" monetary gain without taking into account the decline in the value of money due to inflation. (even if the index rose) |
| Liquidity | High—withdrawal on any business day | Low—the money is locked for a defined period |
Compare and choose correctly
Before choosing a money market fund, it is worth reviewing the table we created for you, based on Capital Market Authority data, and comparing which funds showed the highest return with the lowest management fees.
How do you actually buy a money market fund?
We prepared detailed instructions for you on how to purchase a money market fund at a bank.
In summary
The money market fund is an excellent “working tool” for managing your current money.
It gives you maximum flexibility, better protection against inflation, and improved profit potential, without “locking” the money in the bank. It may not be intended for long-term wealth, but it is a smart and practical solution for money you want to keep available and safe.