How to save better as bank deposits regain relevance

The Bank of Israel’s decision to raise interest rates from 0.5% to 3.25% on Monday translates into an immediate increase in mortgage payments. But on the other hand, a higher interest rate offers solid investment options where households can put their savings.

After more than a decade when the zero interest offered by banks on deposits made it an almost irrelevant option, products linked to the central bank interest rate, which rises or falls in line with the Bank of Israel rate, are suddenly back in vogue. These options are attracting more and more customers, especially at a time when capital markets are volatile.

Israeli banks raised the average interest rate paid on one-year deposits to 3% in October from just 0.27% in April, before the first rate hike, and managed to attract more than NIS 103 billion. to the public only in the last two months. For comparison, let’s note that the total amount of new deposits in March and April was 45 billion manats.

At the same time, they tripled the amount of assets they manage, which are more similar to bank deposits than managed mutual funds or follow certain indexes or sectors (exchange funds) – from 16.5 billion manats to more than 41 billion manats.

Other types of mutual funds specializing in government bonds can be added to these two products. Although they are more volatile than bank deposits or mutual funds, they can yield higher returns – and will not be subject to automatic reductions in return as the Bank of Israel’s interest rate falls.

According to the forecast of the research department of the Bank of Israel and analysts’ forecasts, the interest rate will continue to increase around 3.5-3.75%. However, it is expected to begin to decline next summer, and if so, interest rates on term deposits will also begin to decline.

The main advantage of these last two products, investing through financial mutual funds or bonds, is their liquidity compared to bank deposits. With mutual funds, you can place a sell order when the value is calculated according to the value of the bond on a given trading day (which may reflect a price higher or lower than the price at which the bond was purchased). The return, of course, will not be the same as the promised return at the end of the period, but it will not include the penalties charged by banks when closing the deposit before the agreed date.

Who offers the best interest rate?

As with loans and mortgages, with bank deposits, customers can choose different ways in which they want to invest their money. Banks, despite the name, offer tracks with a fixed interest rate calculated according to the Bank of Israel interest rate, or a track with a variable interest rate – the main track (the Bank of Israel interest rate, plus 1.5). % and less, the financial margin that the bank chooses to give to its customers).

Since the Bank of Israel started raising interest rates in April, banks have increased their fixed interest rates. On Monday, just after the Bank of Israel announced another interest rate hike, the Israel Discount Bank (TASE: DSCT) has announced that it has raised the interest rate on fixed interest deposits to 3.75% for a period of one year.

At the same time, the bank offers a one-year deposit interest rate with a variable rate, which will be the same as the Bank of Israel rate: 3.25% and will be updated according to future Bank of Israel interest rate changes. The bank offering the highest interest rate on a variable rate is One Zero (Israel’s recently launched digital bank), which even before the recent rate hike was offering an interest rate of 3.4% per annum, which is now expected to rise. 3.9%.

However, this is a three-month to one-year deposit, and those who need faster access to money will receive much lower rates on daily or monthly deposits. The interest rate on a bank deposit closed up to three months, where most of the state funds are placed, is currently only 1.05%.

Monthly returns on financial funds revolve around the Bank of Israel rate, as on deposits, but are about 0.1%-0.2% higher. Because they have an average life of up to 90 days and can combine slightly longer maqams (government bonds) and buy very short bonds from banks that add extra fractions of interest.

Dollar funds have collected hundreds of millions of funds this year

Dollar-denominated funds earn higher returns, around 4.5%, because interest rates are higher in the US – and they have already raised hundreds of millions of dollars from Israeli clients this year.

In a third savings product, mutual funds that invest in government bonds, a customer who commits money for three years can earn 3.2%, which is very similar to the prevailing interest rate. However, the advantage of this product over the other two interest-linked products is that even if the Bank of Israel decides to start lowering the interest rate in a few months, this interest rate is guaranteed. Another option is a trust fund that invests in government bonds linked to an index that protects the client from rising inflation, offering a three-year interest rate return equal to the Consumer Price Index (CPI) + 0.5%. This is the income that can protect savings due to the erosion of money in an inflationary environment.

Investing in these funds has additional benefits, says Yaniv Pagot, EVP of trading, derivatives and indices at the Tel Aviv Stock Exchange. “An investor can earn capital gains in addition to the yield paid by bonds. If the market thinks interest rates will drop from 3.25% to 2% today, the investor will still earn 3% annual interest. Plus an additional 3%-4% return on capital and even reaches a 7% return.”

How much tax is due on the profit?

An important issue affecting these decisions about where to save money is the question of taxation when the investment matures. While bank deposits are taxed at 15% of the nominal profit, both mutual funds and mutual funds are taxed at 25%, but only after the nominal profit is adjusted for inflation.

Average inflation expectations in Israel over the next 12 months are estimated at 3%, so if inflation next year meets these forecasts, the investor will only be taxed on gains above 3%. Therefore, investing in government bonds through funds is more tax-advantaged than direct investment in bonds, which requires a 15% tax on nominal profits.

Globes, Israel business news – published by on November 24, 2022.

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