The Reserve Bank of India (RBI) recently announced an increase in interest rates on savings bank accounts. That must have made the bank’s customers happy, since most of them leave a large amount of money in savings accounts.
Sure, now they will earn half a percentage point more in bank savings accounts. The moot point, though, is: Does that make the savings account the best place to keep your funds, which will lie dormant until spent or invested?
savings bank account
Your salary goes directly to the savings account. Its EMI casing eats up a lot of it. Then the checks you’ve written for your credit card payments, utility bills, SIP, etc. consume more. The balance amount accumulates in the savings account month after month.
That’s the story of a typical savings bank account, which offers 4% interest to savers. Interest is calculated on the daily balance in your account. Previously, interest was calculated on the lowest amount in the bank account between the 10th of each month and the last business day of the month. Interest is paid to you at the end of the quarter or half year. That means you now earn more money in your savings account than you did a year ago. But does that still make the savings account the best place to park your idle funds?
Liquid and liquid plus funds
One of the biggest advantages of a savings account is liquidity. You can take the amount whenever you want. But there are ways that offer better returns than savings accounts, without affecting liquidity much. They are known as liquid funds.
Liquid funds are open-ended money market mutual fund schemes that invest in money market calls and other fixed income securities with a maturity period of less than 91 days. Liquid plus funds, also known as very short-term bond funds, are debt mutual funds in which the fund manager invests in securities that may include instruments with a residual maturity of more than 91 days. The yield is generally higher for instruments with longer terms. Naturally, the inclusion of instruments with more than 91 days to maturity boosts the performance of liquid plus funds.
The fund manager puts liquidity and security as basic principles when building the portfolios of these funds. This makes these funds a safer place to park your money. Investors’ liquidity needs are not compromised at all. For all redemption requests submitted and postmarked before the cut-off time, payments are made the next day; this is also known as a T+1 swap.
How do they stack?
You can compare the after-tax returns of both options: savings bank account and liquid plus liquid mutual funds.
“The interest rate on a bank’s savings deposit account is 4%. Very short-term funds offer higher returns,” says Joydeep Sen, senior vice president of the fixed income advisory desk at BNP Paribas Wealth Management.
“If we look at it after taxes, the profitability of ultra-short-term funds is even better. The tax on the distribution of dividends from ultra-short-term funds stands at 13.5% for individual investors, while the interest to be paid on savings bank deposits is taxed at the marginal tax rate, for those who are on the highest slab, is 30.9%,” he says.
According to Value Research, a mutual fund tracking agency, liquid funds returned 6.75% and liquid plus funds returned 6.82% in a year. Looking at one-week returns, both fund categories returned 0.16%. In the current interest rate scenario, liquid funds rank higher than savings accounts. But how long will it be like this?
Recently, the Reserve Bank of India published a discussion paper on the deregulation of the interest rate payable on a savings bank account. A graph in the discussion paper sheds light on what interest rates on bank savings accounts and other key rates have been like in the recent past. It is clear that the money market offers better returns for very short-term investments than the returns offered by the savings account.
Except for a brief period of a couple of quarters in 2009, the interest rate on a savings account has remained below the weighted average interest rate. “The low money market yields were the result of excess liquidity in the system, as RBI, in response to the global crisis, cut key rates in the second half of 2008,” says a credit analyst at a brokerage house. money.
Money market rates are expected to remain high as the economy continues on the path of growth. But what will the scenario be like in the short term?
Crude prices have held firm over the past three months. Given the volatile geopolitical scenario in the oil-producing nations, prices are unlikely to decline. Insufficient recoveries from oil marketing companies have been on the rise, forcing them to raise gasoline prices by Rs 5 per litre. However, diesel prices have not been touched, but the market expects diesel prices to rise in the short term as well. This would drive inflation.
The RBI may continue its wave of rate hikes for longer. “We expect a 50 basis point increase in key interest rates over the next three to six months, which will keep short-term interest rates firm,” says Ramanathan K, CIO-single manager Investments – ING Investment Management. Today, financial instruments with a good credit rating with a maturity of 90 days offer an annualized return in the range of 8.75% to 9.25%.
operational problems
Liquid and liquid funds most score on yield savings bank account, but you need to look at several other aspects of parking facilities to select the one that suits your needs.
A savings bank account allows you to write checks, which is not possible with mutual funds. To pay the rent on the house to the owner, you must redeem your units of liquid funds, allow the proceeds to arrive in the bank savings account, and then write a check.
The second topic is about the operational aspects of investing in these funds. You receive money in the savings account either as salary or from some other transaction. Therefore, the savings account is the parking space for your money by default.
But if you want to put part of that amount into mutual funds, you’ll have to do it yourself or identify a broker who can do it for you.
Since the money in liquid plus funds is parked only for the short term, there would be a correct series of transactions that would take place frequently. It may be difficult for you to find the time or keep track of such transactions. And no institutional or individual broker operating offline will help you as this business is not paid. The only way out for you is to approach an online fund dealer like fundsupermart, investonline.in or invest from online platforms of large institutional dealers.
But before transacting using online platforms, it would be wise to confirm whether fees apply. You can also choose to open an account online with a fund house and map your mutual fund portfolio to that account. This ensures a smooth transfer of funds.
Liquid and liquid plus funds can be further used to increase the return on your investments. “If you have a large body of money to invest in equity, then instead of a systematic investment plan, go for a systematic rollover plan, which gives you both the benefit of averaging into the equity pool as well as better equity returns.” a liquid fund versus a savings account,” says Rajesh Krishnamoorthy, managing director of fundsupermart.com, an online mutual fund distributor.