How to earn more than 4 pc on your Savings account funds

The Reserve Bank of India (RBI) recently announced a hike in the interest rates on savings bank account. That must have made bank customers happy as most of them leave large amount of money lying in savings accounts.

Sure, they will earn half-a-percent more on savings bank accounts now. However, the moot point is: Does that make the savings account the best place to keep your funds, which will be idle till they are spent or invested?

Savings bank account

Your salary goes straight into the savings bank account. Your housing EMI devours a large part of it. Then the cheques you have issued for your credit card payments, utility bills, SIP and so on eat more into it. The balance amount gets accumulated in the savings account month after month.

That is the story of a typical savings bank account, which offers 4% as interest to the savers. The interest is calculated on the daily balance in your account. Earlier, the interest was calculated on the lowest amount in the bank account between the 10th of every month and the last business day of the month. The interest is paid to you at the end of the quarter or half year. That means you earn more money now on your savings account than what you got a year ago. But does that still make 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 avenues 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 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-term bond funds, are debt mutual funds where the fund manager invests in securities which may include instruments with more than 91 days' residual maturity. The yield is generally higher for instruments with longer term. Naturally, inclusion of instruments with more than 91 days to mature boosts the return of liquid plus funds.

The fund manager puts liquidity and safety as the basic tenets while constructing the portfolios of these funds. This makes these funds a safer place to park your money. The liquidity needs of investors are not at all compromised. For, all redemption requests submitted and time-stamped before the cut-off time, the payouts are made the very next day - this is also known as redemption on T+1 basis.

How they stack up?

You can compare the post-tax returns of both these options - savings bank account and liquid and liquid plus mutual funds.

"The interest rate of a bank's savings deposit account is 4%. Ultra short-term funds offer a higher returns," says Joydeep Sen, senior vice-president, advisory desk-fixed income, BNP Paribas Wealth Management.

"If we look at it on a post-tax basis, returns from ultra short-term funds are even better. The dividend distribution tax for ultra short-term funds stands at 13.5% for individual investors, whereas the interest payable on savings bank deposits is taxed at the marginal rate of tax - for those in the highest slab, it is 30.9%," he says.


Source : http://economictimes.indiatimes.com/personal-finance/savings-centre/analysis/how-to-earn-more-than-4-pc-on-your-savings-account-funds/articleshow/8542461.cms

Monindro Saha
Summer Internship – Marketing
DENIP Consultants Private Limited