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How to Get More Than 4% Interest on Your Savings Account

The Reserve Bank of India (RBI) recently announced an increase in interest rates on savings bank accounts. This must have pleased the bank’s customers as most of them leave large sums of money in their savings accounts.

They’re sure to get half a million more in their savings bank account now. However, the point is: Does this make a savings account the best place to keep your money, which is idle until it is spent or used?

Savings bank account

Your salary goes directly into your savings bank account. Your home EMI accounts for a large portion of this. Then the checks you issue for your credit card payments, utility bills, SIPs and so on eat more into it. The amount is accumulated in the savings account every month.

This is the story of a typical bank account, which pays 4% interest to depositors. Interest is calculated on the daily balance in your account. Previously, interest was calculated on the lowest balance 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 each quarter or half year. This means you have more money in your savings account right now than you did last year. But does a savings account still make the best place to put your idle money?

Cash and cash plus cash

One of the biggest advantages of savings accounts is liquidity. You can withdraw money whenever you want. But there are methods that provide better returns than savings accounts, without affecting liquidity. They are called liquid funds.

Liquid funds are open market mutual funds that invest in call money and other income streams with a maturity period of less than 91 days. Liquid plus funds, also known as ultra short-term bond funds, are debt mutual funds that fund managers invest in securities that may include instruments with maturities longer than 91 day. In general, the results are higher for devices with longer durations. Of course, adding instruments with more than 91 days to maturity increases the return on investment plus money.

Fund managers place liquidity and safety as the basic principles of building a portfolio of these funds. This makes these funds a safer place to put your money. Investors’ needs never fade away. Because, for all redemption requests submitted and sealed before the cut-off time, payment is made the very next day – also known as redemption on a T+1 basis.

How do they meet?

You can compare the after-tax returns of these two options – savings and liquid bank accounts and liquid plus mutual funds.

“The interest rate on savings bank accounts is 4%. Short-term funds offer higher returns,” said Joydeep Sen, senior vice president, fixed income at the board. consultant, BNP Paribas Wealth Management.

“From an after-tax perspective, returns from short-term funds are better. The dividend distribution tax for short-term funds is 13.5% for individual investors, but the interest that can be paid to the savings bank. is taxed at the marginal tax rate – for those in the highest bracket it is 30.9%,” he said.

According to Value Research, a fund tracking agency, gasoline funds have offered 6.75% and bond-plus funds have returned 6.82% over the past year. If we look at the weekly returns, both categories have offered a return of 0.16%. In today’s high interest rate environment, liquid funds are getting more points than savings bank accounts. But how long will this take place?

Recently, the Reserve Bank of India issued a discussion paper on the abolition of interest rates payable on savings bank accounts. A chart in the discussion paper explains how interest rates on savings bank accounts and other key rates have changed recently. It is clear that the stock market offers better returns for very short-term investments than the returns offered by bank accounts.

Except for a short period of time in the second quarter of 2009, the interest rate on bank savings accounts was still lower than the call rate. “The low stock market returns are a result of the lack of liquidity in the system because the RBI, in response to the global crisis, cut key rates in the second half of the year 2008,” notes the credit analyst at the financial institution.

Stock market rates are expected to be higher as the economy continues to grow. But what will the scenario look like in the short term?

Oil prices have been stable over the last three months. Given the turbulent geopolitical situation in oil-producing countries, prices are unlikely to drop. The losses of the oil companies increased, forcing them to increase the price of petrol by Rs 5 per litre. However, oil prices were not affected, but the market expects diesel prices to rise in the near term as well. This may increase the cost of living.

The RBI may continue to hike interest rates for some time. “We expect a 50 basis point increase in key interest rates over the next three to six months, which will keep interest rates stable,” said Ramanathan K, CIO-sole managing director. – ING investment management. Currently, a good financial instrument with a maturity of 90 days gives an annual yield of 8.75% to 9.25%.

Functional problem

Liquids and liquid plus money earn more points than savings bank accounts in return, but you have to look at other aspects of the station to choose the one that suits your needs.

A savings bank account allows you to issue checks, which is not possible with common currency. In order to pay the rent to the landlord, you have to withdraw your liquid funds, let the money go to your savings bank account and then issue a check.

The second issue concerns the operational aspects of investing in these funds. You receive money in your savings bank account either as a salary or from other transactions. Therefore, a savings bank account is a parking place for your money by default.

But if you want to put part of that money in the fund, you have to do it yourself or find an agent who can do it for you.

Because the money in liquid plus funds stays for a short period of time, a series of transactions may occur frequently. You may find it difficult to find the time or monitor such transactions. And there is no staff of government institutions or individuals working in online setup to help you because this company does not take any salary. Your only way out is to approach an online fund distributor like fundsupermart, investonline.in or invest in the online platforms of major institutional distributors.

But before you transact online, it’s a good idea to check if any charges apply. You can also choose to open an online account with a financial institution and map your portfolio with that account. This ensures hassle-free money transfer.

Liquid and liquid plus funds can be used further to improve your return on investment. “If you have a lot of money to invest in equity, then choose a systematic investment plan, which gives you the benefits of average mutual funds as well as better returns on mutual funds. vis a. in savings accounts,” said Rajesh Krishnamoorthy, managing director, fundsupermart.com, an online mutual fund distribution company.

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