2. Comparative Analysis

2.1 Risk Profile

Cash funds generally carry a low risk, slightly higher than shekel deposits. Shekel deposits, on the other hand, are considered very low risk, as they are guaranteed by the bank.

2.2 Liquidity

Cash funds offer high liquidity, allowing investors to withdraw funds at any time. In contrast, shekel deposits have low liquidity, usually imposing penalties for early withdrawal.

2.3 Volatility

Cash funds experience low volatility, though it is present. Shekel deposits have no volatility, offering a fixed interest rate.

2.4 Management

Cash funds are professionally managed by investment experts, while shekel deposits require no active management.

2.5 Investment Diversification

Cash funds offer diversification across multiple financial instruments, whereas shekel deposits represent a single product investment with no diversification.

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3. Tax Implications

3.1 Cash Funds

Cash funds enjoy a fund-level tax exemption, meaning the fund itself is not taxed on its income. Investors pay a 25% tax on gains only when withdrawing funds, and the tax is calculated on inflation-adjusted gains. This method of taxation offers a significant advantage in terms of tax deferral.

3.2 Shekel Deposits

Shekel deposits are subject to a lower tax rate of 15% on profits. However, this tax is levied on the full gain, including inflationary components. Additionally, there is no tax deferral option, as tax is paid on interest periodically.

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4. Additional Advantages of Cash Funds

Cash funds offer several additional advantages. The tax deferral aspect allows for tax-free compounding, as tax is paid only upon withdrawal. They also provide flexibility in loss offsetting, where capital losses can be offset against gains from cash funds, an option not available with shekel deposits. Furthermore, cash funds are suitable for investors requiring high liquidity, such as businesses or individuals maintaining cash reserves.

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5. Considerations for Corporate Investors

Corporate investors face additional considerations when choosing between cash funds and shekel deposits. Companies pay a uniform tax rate of 23% on both deposit income and cash fund profits. Since 2008, the elimination of inflationary deductions has affected the profitability of deposit investments for companies. Additionally, investment in taxable funds may lead to double taxation for companies, a factor that needs careful consideration.

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6. Conclusion and Recommendations

While both cash funds and shekel deposits offer relatively safe investment avenues, they differ significantly in terms of taxation, liquidity, and flexibility. When choosing an investment vehicle, investors should consider their desired risk level, liquidity needs, investment horizon, personal or corporate tax considerations, and the fees and management costs associated with each option.

Both individual and corporate investors should carefully evaluate the advantages and disadvantages of each investment option based on their financial situation and goals. Given the complexities of tax implications and the varying needs of different investors, it is highly recommended to consult with a qualified investment advisor or tax expert for personalized advice. This professional guidance can help ensure that the chosen investment strategy aligns with the investor's financial objectives while optimizing tax efficiency within the framework of Israeli tax laws.

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