How to save as bank balances regain importance

The Bank of Israel’s decision on Monday to raise interest rates by 0.5% to 3.25% immediately results in an increase in mortgage payments. But on the other hand, higher interest rates offer solid investment options that households can put their savings into.

After more than a decade where the zero interest offered by banks on deposits made it an almost irrelevant option, products linked to central bank rates, which rise or fall according to the Bank of Israel’s rates, are suddenly back in vogue. These options attract more and more customers, especially in times when financial markets are volatile.

Israeli banks have raised the average interest paid on deposits for one year from fixed rates from just 0.27% in April, before the first interest rate hike, to 3% in October and have managed to collect more than 103 billion Icelandic ISK from the bank. officially in just the last two months. For comparison, total deposits in March and April were only around ISK 45 billion.

At the same time, financial securities funds, which in the nature of their activities are more similar to bank deposits than managed mutual funds, or those that follow certain indexes or sectors (stock exchange funds), tripled the amount of assets they manage – from 16.5 billion Icelandic krona to more than 41 billion.

To these two products can be added another type of mutual funds, those that specialize in government bonds. Although they are more volatile than bank deposits or treasury funds, they can also generate higher returns – and will not suffer an automatic reduction in returns when Bank of Israel rates fall.

According to the forecast of the research department of the Bank of Israel and analysts’ forecasts, interest rates will continue to rise to around 3.5%-3.75%. However, it is expected that it will begin to decrease next summer, and if that is the case, interest rates on fixed deposits will also decrease.

A major advantage of the latter two products, investing through mutual funds or in bonds, is their liquidity compared to bank deposits. With mutual funds, sell orders can be given when the value is calculated according to the value of the bond, on a given trading day, (which may reflect a high or low price compared to the price at which the bond was purchased). Of course, the return will not be the same as promised for redemption at the end of the period, but it does not include a penalty like the banks impose when closing a deposit before the agreed date.

Who is offering the best interest rates?

As with loans and mortgages, so with bank deposits, customers can choose different ways in which they want to deposit their money. The banks offer fixed interest rates which, despite the name, are calculated according to the Bank of Israel interest rate, or a variable interest rate rate – the main track (Bank of Israel interest rate, plus 1.5% and minus the financial flexibility that the bank chooses to give to its customers ).







Since Bank of Israel interest rates began to rise in April, the banks have raised fixed interest rates. On Monday, immediately after the Bank of Israel announced another rate hike, Israel Discount Bank (TASE: DSCT) announced that it is once again raising interest rates on one-year fixed-rate deposits to 3.75%.

Furthermore, the bank offers interest on one-year deposits at a variable interest rate, which will be the same as the Bank of Israel’s interest rate: 3.25% and will be updated in accordance with future Bank of Israel interest rate changes. The bank offering the highest interest rate in variable rates is One Zero (Israel’s recently launched digital bank), which even before the last rate hike was offering 3.4% annual interest and is now expected to rise to 3.9%.

However, it is a deposit for three months to one year, and those who need faster access to the money will receive a much lower interest rate on daily or monthly deposits. The interest rate on deposits in banks that are closed for up to three months, where most of the public funds are deposited, is now only 1.05%.

In financial funds, the monthly yield fluctuates around the rate of the Bank of Israel, as with deposits, but higher by 0.1%-0.2%. This is because they have an average life of up to 90 days and can combine slightly longer makams (government bonds), as well as buy very short bonds from banks, which add additional percentages.

Dollar funds have raised hundreds of millions this year

Dollar financial funds offer even higher returns, around 4.5%, because the interest rates in the US are higher – and they have already collected hundreds of millions of dollars from Israeli clients this year.

In the third savings product, mutual funds that invest in government bonds, a customer who locks up money for three years can earn a 3.2% return, very similar to current interest rates. However, the advantage of this product over the other two interest-guaranteed products is that these interest rates are guaranteed, even if the Bank of Israel decides after a few months to start lowering interest rates. Another option is a fund that invests in government bonds that are linked to an index that protects the client against increased inflation and they offer a three-year interest return equal to the Consumer Price Index (CPI) + 0.5%. This is a return that can protect savings from the erosion of money in an inflationary environment.

Head of Trading, Derivatives and Index Trading at the Tel Aviv Stock Exchange, Yaniv Pagot, says investing in these funds has an added advantage. “The investor can profit above the return that the bonds pay also by profiting on the capital. If the market believes that interest rates will decrease from 3.25% today to 2%, the investor will still be able to receive 3% annual interest. plus an additional capital return of 3 An additional %-4% – and even achieve a 7% return.”

How much tax must be paid on profits?

An important issue that affects these decisions about where to save money is the question of taxation, when the investment matures. While bank deposits carry a 15% tax on nominal profits, both financial funds and funds investing in bonds require 25% tax, but only after nominal profits are adjusted for inflation.

Average inflation expectations in Israel over the next 12 months are estimated at 3%, so if inflation in the coming year meets these forecasts, the investor will only be taxed on excess gains above 3%. Therefore, investing in government bonds through the funds is more preferable from a tax point of view than direct investment in bonds that require payment of 15% tax on nominal profits.

Published by Globes, Israel business news – en.globes.co.il – November 24, 2022.

© Copyright Globes Publisher Itonut (1983) Ltd., 2022.


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