Money Market Fund: The Modern Alternative to a Bank Deposit
A money market fund is a solid, liquid investment option that lets your money work without locking it in for a fixed term, like a bank deposit. On this page, we explain how the fund works, its advantages and disadvantages, how taxation works, and how it compares with a deposit and Makam (short-term government bill).
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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 those seeking a safe place to “park” their money. They are managed by professional investment managers under the close supervision of the 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 highly conservative assets, such as large bank deposits and Makam (short-term government bill)"Short-Term Loan" – a one-year government bond that serves as a relatively low-risk investment instrument..
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, money market funds have become one of the strongest alternatives to bank deposits, thanks to their combination of liquidityThe speed and ease with which money can be withdrawn from an investment and converted into cash in a bank account without significant penalties.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, where the money is “locked,” with a money market fund, you can withdraw your money on any trading day.
- Significant tax benefit: With a deposit, you pay tax on every shekel you earn. With a money market fund, you pay tax only on the real gainThe actual gain remaining from an investment after deducting the rate of inflation. (what you earn beyond InflationA process of general price increases that reduces the purchasing power of money (the same amount of money buys fewer products).). If prices rise by as much as the interest rate, you will not pay tax at all.
- Fee savings: At most banks, there are no custody fees or purchase or sale commissions on money market funds (it is worth checking this in your account!).
- Flexibility: You can invest in a money market fund with almost any amount, small or large. Usually, there is no need for a high “minimum amount” to receive good interest.
- Conservative investment: The fund invests in short-term, low-risk assets and is therefore considered one of the most conservative investment instruments in the capital market.
The disadvantages: So what is the risk?
- No guaranteed interest: Unlike a deposit, where the interest rate is fixed in advance, the returnThe profit (or loss) from an investment over a certain period, usually expressed as a percentage of the original amount invested. here 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 money, not for accumulating significant wealth 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 the trading day |
| Tax | Real (only above inflation) | — |
| Management | Simple | Requires an investment account |
Bottom line: A money market fund in a nutshell
- “What it is:”
- A highly conservative investment fund that holds short-term, low-risk assets.
- “What it is not:”
- A fixed-term bank depositA bank savings product in which a sum of money is "locked" for a defined period in exchange for a predetermined interest rate. or an investment that guarantees a pre-set return.
- “Who it is suitable for:”
- Money you need in the short term and want to keep liquid and available.
- “Main advantage:”
- High liquidity and returns that are usually higher than those of bank deposits.
- “Main disadvantage:”
- There is no commitment to a fixed interest rate, and the value may fluctuate slightly according to market conditions.
Frequently asked questions
Is a money market fund suitable for any amount of money?
Yes. You can invest relatively small amounts as well.
How do you invest in a money market fund?
To get started, you need a securities account (at a bank or investment house). After choosing the fund, enter the investment amount and confirm.
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 you withdraw the money (liquidity)?
The fund is traded once a day, so the order 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 conservative instruments in the capital market. It invests in safe assets such as:
- Short-term bank deposits: Short-term bank deposits.
- Makam (short-term government bill): One-year government bonds.
- Highly rated corporate bonds: Loans to strong, stable companies.
Please note: As this is an investment product, there may be very slight fluctuations in the fund's value.
Can you lose money in a money market fund?
Theoretically, yes, because it is an investment product. In practice, due to the nature of the assets (short-term and conservative), volatility is minimal. It is the closest thing to “safe” that the capital market has to offer.
How does taxation work? (The real advantage)
You pay 25% tax on gains in a money market fund, but the major advantage is that the tax is based on real gains. That is, you pay only on gains generated above the rise in the index (inflation).
Simply put:
- If the fund rose by 3% and inflation was 3% – you will not pay tax at all.
- If the fund increased by 4% and Inflation was 3%, you will pay tax only on the excess 1%.
A brief example: if 10,000 NIS was invested in a Money market fund and, at the end of the period, the investment value rose to 10,300 NIS, this represents a Nominal gain of 300 NIS. If Inflation during the same period was 3% (meaning a price increase of approximately 300 NIS), the Real gain is zero—so no tax will be paid.
In contrast, if the investment value had risen to 10,400 NIS, a Real gain of 100 NIS above Inflation would have been generated. In that case, tax would be paid only on the Real gain—25% of 100 NIS, i.e., 25 NIS.
Comparison of a Money market fund and a Bank deposit
| Feature | Money market fund | Bank deposit |
|---|---|---|
| Expected gain | Usually higher, but not guaranteed | Known in advance, but usually lower |
| Taxation | 25% on the Real gain (above the index) | 15% on the Nominal gainThe "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 in for a defined period |
Compare and choose wisely
Before choosing a Money market fund, review the table we created for you based on Capital Market Authority data, and compare which funds delivered the highest Return with the lowest management fees.
How do you actually buy a Money market fund?
We have prepared a detailed guide on how to purchase a Money market fund through a bank.
In summary,
A Money market fund is an excellent "working tool" for managing your day-to-day money.
It gives you maximum flexibility, better protection against Inflation, and improved profit potential, without "locking" your money in the bank. It may not be intended for long-term wealth building, but it is a smart, practical solution for money you want to keep available and secure.