Following the declines in the markets, January 2022 did not brighten the face of savers in the investment provident funds either. The funds fell by an average of 1.8% in the general track and 3.1% in the stock track, but savings are long-term, so it is important to remember that over time the stock markets rise. This is neither a forecast nor a prophecy, but a long-standing statistic. This of course can change, no one can guarantee a return on the capital market – and be very careful of people who guarantee you a guaranteed return.
In 2021 the general track yielded an average return of 13%, and the stock track yielded 23% – these are high returns, do not get used to them. The average annual return in the general track is about 5% and in the stock track of course more. But the medium-term yields show that even when the falls in the markets are taken into account – the market usually corrects. Fact is, in a span of 3 years in the general track the return stands at 27% on average, in the equity track it stands at 50%. Over a period of 5 years in the general track the return stands at 38% on average, and 73% in the equity track.
So where is the market going? Will it continue to go down or will it go up again? We of course do not know. But if you are in the long-term capital market – then one month is weak or strong, should not affect your decision.
5 years ago, investment provident funds were launched, with the aim of getting the public to save money for a long-term term. True, it is possible to withdraw the funds earlier, but those who wait for a pension will be able to enjoy tax benefits (extension – later in the article)
These are the returns on the general track in January 2022:
These are the returns on the stock track in January 2022:
The conclusion from the fact that in almost every period those who lead are other entities is again this: it is difficult to impossible to know in advance which manager will achieve a better return, so in addition to returns it is equally important to check management fees and lower them as much as possible. The management fee can be known in advance and negotiated.
However, the entities that meanwhile manage to better manage the money in the investment provident funds are Analyst, Yellin Lapidot and Phoenix.
What is an investment provident fund?
An investment provident fund is a relatively new product and a bit difficult to digest, but when the public has realized the benefits, it has transferred significant amounts of money to these funds. The volume of assets managed in these funds is about NIS 30 billion and this is the fastest growing category in the provident funds. That was the Treasury’s goal with the product launch five years ago – to divert funds to savings that may be long-term, and it’s gradually succeeding.
In fact, it is not a provident fund. Despite the name – “investment provident fund”, the investment provident fund is not obligated to save for the long term as there is in the other funds. But it is also better to save in a long-term investment provident fund because then you enjoy the tax benefits of long-term savings (the pension savings – pension and ordinary provident funds). On the other hand – the saver can liquidate the cash register at any time he wants.
That is, there is a built-in advantage here in the definition over short-term investments, because unlike mutual funds for example – which by definition have no tax benefits – here you can invest even if you are not sure for what period of time you want to invest. Another advantage, by the way – it is possible to switch between funds and tracks without the event being considered a sale event for tax purposes (ie without paying tax in the transition between funds).
The investment in a provident fund for investment is limited to NIS 70.9 thousand per year (starting at NIS 70,000 index-linked), which in many cases constitutes a disadvantage. In mutual funds there is of course no limit. Also, in the device of insurance companies – savings policies, there is also no limit. Savings policies are similar in nature to investment provident funds, although management fees are usually higher.
Investment provident funds have a number of tracks, with the main tracks being the general track which consists mainly of bonds with a stock component. This is the leading route, by definition, in the savings of Israelis – both in investment provident funds, in study funds and in long-term savings, and the reason is that the public usually ‘flows’ with what it receives and does not actively choose an investment route. This is not always wise, as a small action can yield significantly higher profits in the long run (see for example this article which talks about the psychological biases that cause even when we are already comparing prices and trying to be smart consumers – we make critical mistakes and invest efforts in the wrong places ).
Beyond that, there is the stock track that is suitable for young people – For over time the return on shares is higher than the return on solid channels and young people have a long investment range – such that even if there is a collapse, the market will have time to repair. The yields now being published prove it again (in February-March 2020 following the Corona markets the markets fell by 30%, but have since corrected all the declines and much more).
Passive or active management?
In recent years the idea that CFOs cannot present an excess return compared to stock indices has also penetrated the long-term savings industry. Following this, both Menora and Excellence launched investment provident funds in the equity track that include passive management (in the past year, pension funds were also launched that follow the S&P 500 index from Phoenix and Hellman Aldubi – which was merged into it).