A seemingly innocent announcement by the Bank of Israel hides an interesting story – “Against the background of the high volumes of demand for the purchase of MCM in Bank of Israel tenders in the recent period, the MCM issuances in the near future and until further notice, will be carried out twice a month, this compared to one issuance per month until now. This change The frequency of the issuances will come into effect starting next week.”
Next Tuesday, another MCM issuance will take place in the total amount of 10 billion shekels – 6 billion shekels for a period of 3 months and 4 billion for a period of one year.
Behind this innocent announcement there is a big impact on the solid market. The MQM is a type of one-year bond – a Bank of Israel bond, for sure, that provides a shekel interest rate. The yield is now 3.2%. This is competition for the short-term bonds that exist in the market. Not quite head to head, but when a body like the state expands Fundraising takes in funds and leaves less for others.
But the really big impact is in the deposit market – MCMs are a substitute for deposits, a proper replacement, a very competitive replacement. MCMs allow the public to save for a period of up to a year, with a good return and what’s more – without the confusion of the banks’ minds – stop another year, no You can leave halfway. All the deposits with the supposedly good shekel yield offered by the banks have a big hump – you can’t sell-realize in the middle of the road. You park the money for a year. This option of leaving during the period is worth money, the question is how much?
If you make an effort, banks will reach a deposit with a yield of 3.5%, i.e. 0.3% above the MQM – is it better? Not sure at all. The option to exit during this year is worth several good tenths. Beyond the big difference – the marketability and liquidity of the MQM compared to the deposit also has A built-in disadvantage – the MCM may decrease during the period, if the interest rate in the economy continues to rise, so a holder who wants to exercise during a period can lose. Those who hold until the end – will earn the yield that the MCM realized on the day of purchase.
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Another difference – in MKM there are sales and purchase commissions that reduce the return for investors, but they go down, you can and should pay 0.05% at the most for such a transaction. Deposits, of course, do not have such commissions. In terms of taxation – both instruments are nominal (provide shekel interest). And the respective tax is 15% on the profit.
The MKM versus a government bond
In most cases, the bonds are traded for a longer period, and therefore they are exposed to an interest rate risk that does not exist in the short term, and on the other hand, they should provide a higher return given the risk. In other words, it is actually two different types of investment – a solid short-term investment and a solid longer-term investment in which There is at the same time both risk and a higher chance. People who want to preserve the value of the money and need it for a short time, will probably prefer the short-term bonds and the MCM. Long-term bonds are a completely different game, because if there are changes in interest rates, and you invest for a year, you can lose a lot of money (long-term bonds went down 20% in the last year, it won’t come back, but you can still lose a good percentage), while that you do not lose in short-term bonds and MCMs, you will earn the return according to which you invested in the instrument.
It is possible to invest in MQM directly and you can also buy a fund that imitates MQM and or a financial fund that is intended for investment in MQM and other solid instruments for repayment in a very short term. In these instruments, it is important to see what the management fees are, so that the yield is not damaged, in practice fees Management in financial funds and hedge funds are particularly low.
Financial funds – advantages and disadvantages
The management fees in the shekel financial funds range from only 0.02% to 0.17%, far below the average management fees in the mutual fund industry in Israel, which is about 0.68%.
These management fees, along with the yield they generate, which is expected to be an annual shekel of about 3%-3.5%, make them an interesting instrument. First, they have an advantage of size, so they can get a better return compared to banks and others. Second, they are marketable and liquid, and third, their management fees are low.
Beyond that – and this has a great significance today: the tax in a financial fund is on the real profit (profit minus linkage), but the index stands at 5% and the expectations are that it will drop towards 3% in the coming year, and the tax, which is 25% on the real profit, is expected to be very low Regarding the tax on the alternatives – 15% on the nominal profit. It’s a savings of a few good tenths, it’s an advantage of finances.
Another advantage is that profits from a financial fund can be offset against other investment losses, while profits from deposits cannot be offset.