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You got sick of the low interest you get on your shekel deposits.

You arrange a meeting with an investment adviser at one of the investment banks. You drive up to a glittering new office building, and ask the guard which floor the investment firm occupies. Leaving the elevator, you walk into a luxurious office, featuring well-groomed youngsters scurrying madly and a chic receptionist, who asks who your meeting is with. She will also offer you coffee.

Your host arrives in one minute and the coffee in two. While you sniff it dubiously and wonder exactly what that is floating on top, the adviser will introduce himself and launch into light chitchat designed to put you at ease. What do you do? How did you come across us? Where did you park?

Coffee and pleasantries over, the first real question arrives: "How much money do you have to invest?" Ah, a few hundred thousand. Then she will ask about your appetite for risk.

Well-versed in market lore, you reply that you slaved to save that money, you want a diversified portfolio and don't want too much risk, maybe 20-30% in stocks. "What do you think?" you ask her.

She probably thinks it's time to expand your investments abroad, and that the investment bank believes in a big shares component because returns in other avenues arrangement low.

And then she surprises you: "Do you prefer to invest through a personal portfolio, or a mutual fund?"

You are surprised. You thought the whole reason to come to an investments firm is to build a personal portfolio that they'd manage for you. You can get into a mutual fund anywhere. You explain that.

But is that smart? You're sort of medium in scope: is a personal portfolio the best way to go?

What the leavers leave behind

If you examine the conundrum via fees, you'll learn that the fee for managing a personal portfolio runs between 1.5% to 2.5% of assets, generally, based on the size of the shares component. The fee in mutual funds can be as high as 4%. That's some difference. Yet in many cases, management of a personal portfolio turns out to generate lower yields, especially post-tax. Why?

The first reason is that almost all Israeli investors, 99% according to some experts, fear over-concentration of their portfolio and want diversification. If granny told you never to put all your eggs in one basket, then a mutual fund or ETF is more suitable for you.

The second reason is the more important one, and it has to do with tax. In the case of  personal portfolio, when you buy and sell shares yourself, you pay tax of 20% of your gains. Your portfolio manager will  try to play around with buying and selling to offset losses from gains, but that almost always winds up in tears, meaning, a fat tax bill.

On the other hand, you don't pay tax on gains from a mutual fund until the day you sell your units in the fund. The result is a significant tax benefit, and an effect of compound interest: the fund continues to invest the "deferred tax".

Insofar as tax is concerned, investment in a mutual fund is several times more efficient than a personal portfolio.

There is a third element, a small one, but it builds up. Each time a member sells his mutual fund units, he does it at a slightly lower price than paid by the next investor to join. The result is that redeemers leave a little money behind for the ones that stay. If you stay in a mutual fund for a long time, you gain a little extra, that builds up over time.

If you prefer to take the risk and invest in a handful of stocks, a personally managed portfolio is the thing for you. It can be the fastest way to make money, if you bet right. But it is the riskiest avenue. If like most Israelis you aren't enamored of risk, consider a mutual fund, despite the higher fees.

"After twenty years of experience, I can say that a personal portfolio is mainly an ego trip," remarked one veteran portfolio, and mutual funds, manager. "We pat the ego of the clients. It's nice, there's somebody to talk to, buy sell, and come Friday the client can boast to his friends that his portfolio manager bought this or that for him. But in practice they pay a lot of money and don't get particularly impressive returns. For the small, or even the medium investor, a mutual fund or ETF is the way to go."