How to get more than 4% interest on your savings account
The Reserve Bank of India (RBI) has recently announced an increase in savings bank account interest rates. This must have pleased bank customers, as most of them leave large sums of money in savings accounts.
Of course, now they will earn half a percent more from savings bank accounts. The moot question, however, is: Does this make a savings account the best place to store your funds that will sit idle until spent or invested?
Savings bank account
Your salary goes straight into your savings bank account. Your housing EMI absorbs a large chunk of it. Then the checks you issued for your credit card payments, utility bills, SIPs, etc. eat up more. The balance amount is accumulated in the savings account month after month.
This is the story of a typical savings bank account that offers 4% as interest to savers. Interest is calculated on your daily account balance. 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. Your interest is paid at the end of the quarter or half year. That means you’re earning more money in your savings account now than you did a year ago. But does that still make a 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 withdraw the amount whenever you want. But there are ways that offer better returns than savings accounts without affecting liquidity much. These are known as liquid assets.
Liquid funds are open-ended money market mutual fund schemes that invest in call money market and other fixed income securities with a maturity period of less than 91 days. Liquid plus funds, also known as ultra-short bond funds, are debt mutual funds where the fund manager invests in securities, which may include instruments with more than 91 days remaining maturity. Yields are generally higher for instruments with longer maturities. Naturally, the inclusion of instruments with more than 91 days to maturity increases the return on liquid plus funds.
The fund manager places liquidity and safety as the main principles in 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. As all redemption requests submitted and time-stamped before the cut-off time, payouts are made the very next day – this is also known as a T+1 redemption.
How do they stack up?
You can compare the after-tax returns of both the options – Savings Bank Account and Liquid and Liquid Plus Mutual Funds.
“The interest rate on the savings deposit account at the bank is 4%. Ultra-short-term funds offer higher returns,” says Joydeep Sen, Senior Vice President, Fixed Income Advisory, BNP Paribas Wealth Management.
“If we look at it on a post-tax basis, the returns from ultra-short-term funds are even better. Dividend tax on ultra-short-term funds is 13.5% for individual investors, while interest payable on savings bank deposits is taxed at the marginal tax rate – for those in the highest rate it is 30.9%,” he says.
According to Value Research, a mutual fund tracking agency, liquid funds offered 6.75% and liquid plus funds returned 6.82% in one year. If we look at the returns for a week, both the fund categories offer 0.16% returns. In the current interest rate scenario, liquid assets are valued higher than savings bank accounts. But how long will that be?
Recently, the Reserve Bank of India has come out with a discussion paper on the deregulation of the interest rate payable on a savings bank account. A chart in the discussion paper sheds light on how interest rates on bank savings accounts and other key rates have fared in the recent past. Clearly, the money market offers better returns for many short-term investments than the returns offered by a savings bank account.
Except for a brief period of several quarters in 2009, the interest rate on a savings bank account remained lower than the weighted average payout rate. “Low money market returns were a result of excess liquidity in the system as the RBI, in response to the global crisis, cut key interest rates in the second half of 2008,” a credit analyst at a fund house pointed out.
Money market rates are expected to remain high as the economy continues on a growth path. But what will the short-term scenario be?
Crude oil prices have been stable over the past three months. Given the volatile geopolitical scenario in crude oil producing countries, prices are unlikely to fall. The under-recovery of oil trading companies is on the rise, forcing them to hike petrol prices by Rs 5 per litre. However, diesel prices are not affected, but the market expects diesel prices to rise in the short term as well. This would increase inflation.
RBI may keep raising rates for some time. “We expect a 50 basis point increase in prime rates over the next three to six months, which will keep short-term interest rates stable,” said Ramanathan K, CIO-Single Investment Manager – ING Investment Management. These days, financial instruments with a good credit rating and maturing in 90 days offer annual returns in the range of 8.75% to 9.25%.
Liquid and liquid plus funds have a higher return than a savings bank account, but you need to look at various other aspects of parking facilities to choose 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 landlady’s house rent, you must redeem your liquid currency units, let the proceeds go into your savings bank account, and then write a check.
The second question is about the operational aspects of investing in these funds. You receive money in the savings bank account either as a salary or from another transaction. Therefore, a savings bank account is the default place to park your money.
But if you want to put some of that amount into mutual funds, you’ll either have to do it yourself or find an agent who can do it for you.
Since money in liquid plus funds is parked only for short periods, there will be a regular series of transactions that take place frequently. You may find it difficult to find time or keep track of such transactions. And no institutional or individual agent working in an offline setting will help you as this business is not profitable. The only way out for you is either to approach an online fund distributor like fundupermart, investonline.in or make investments from online platforms of large institutional distributors.
But before transacting through online platforms, it would be wise to confirm if there are any applicable charges. You can also choose to open an online account with a fund house and map your portfolio of mutual funds into that account. This ensures a smooth transfer of funds.
Liquid and Liquid Plus funds can be further used to increase your investment returns. “If you have a large pool of money to invest in equity, then instead of a systematic investment plan, opt for a systematic rollover plan, which gives you both the advantage of equity fund averaging and better returns on a liquid fund versus a savings account says Rajesh Krishnamurthy, managing director of fundupermart.com, an online mutual fund distribution company.
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