In this new era of banking Industry where the rise of digital technologies and consumer-friendly environment, the level of intimacy with the customer is decreasing. According to a survey, done by a Business process management firm Genpact, around 55% of the people said that they would move to another bank for better financial incentives. Typically, the amount of money that is not intended to be used for daily expenses is parked into savings accounts. This money can be withdrawn anytime, hence savings account is completely liquid, at the same time earning some interest on parked money.
Earlier before 2011, the Interest rate on savings accounts was fixed at 3.5 % per annum but post-2011, RBI deregulated the rates where banks are allowed to fix their own savings interest rate. Due to such regulation, Savings interest rate offered by banks in India range from 3.50% to 7 %.
|Name of the Bank||Savings Interest Rate||Minimum Deposited Amount|
|State bank of India – Basic savings account||3.5 %- 4%||Nil|
|PNB saving deposit ( General ) account||3.5 % – 4 %||Rs 500 to 1,000|
|Kotak Bank Nova Savings Account||5 % – 6%||Rs 5000|
|ICICI Bank Regular Savings Account||3.5 % – 4 %||RS 10,000 in metro and urban locations. Rs 5,000 in Semi-Urban and Rs 2,000 in rural locations.|
|Axis Bank Basic Savings account||3.5 % – 4 %||Nil|
|Yes-Bank Savings Value account||5% – 6.25 %||N.A|
Saving accounts allow you to deposit or withdraw money frequently. However, with such account, you need not have to pay your daily expense needs. As they come with daily withdrawal limits and sometimes with minimum account balance requirement. So, Some financial experts recommend that balance in your savings account ideally be around the same amount as your expected bill for at least 3- 4 months. You can utilize buffer amount to meet some sudden crisis. A crisis like job loss, long leave from work due to illness, any hit in running the business, etc.
Is the savings account remains a single option to create a contingency fund?
Last few months have been tough for conservative investors due to falling interest rates on savings accounts but one should consider some alternative investment options on the basis of return ratio in short-term and long-term perspective.
Alternatives to a savings account
1. Liquid schemes
Liquid Schemes can be a good choice for building a contingency fund other than Savings bank account as they used to generate significantly higher returns of around 8 % compared to average 4 % given by ordinary savings bank account. However, there is little bit change in the situation. Now, at the category level, liquid funds annual return fit around 6.5%.
Also, the return form liquid fund may further come down in future. Further, interest from savings bank accounts is tax-free up to only Rs 10,000 while the tax on liquid fund depends upon holding period. For more than 3 years, liquid funds retain their charm and post-tax return work out to be around 5.5 % to 6 % better than the previous case. If you are in the compulsion to withdraw it before three years, still return falls to 4% -5% ( more than savings bank accounts).
2. Fixed deposit
For a majority of Indian population, FD is first go-to investment choice due to the higher interest rate. While the interest rate is higher, one should never ignore that the effective return will be much lower after factoring the combined impact of inflation and tax on interest. It is much possible that in near future banks may lower rates for FD. Nevertheless, Fixed deposit still remains the risk-free option
3. Debt Funds
A very good alternative to savings deposits as debt fund is one that invests in fixed income securities. Like bonds, Commercial paper, money market instruments etc. One can opt for this option keeping the time horizon of one to three years. This is for short-term debt funds. You must consider the fact that bond prices fall when interest rate increases.
4. The stock market and equity-based mutual funds
You may have a healthy appetite for risk in search of the maximum return on your savings. Then you can park your money for investment in direct form by opening a De-mat account. Or indirectly by the equity-based mutual fund. If you stay invested for long-term, you may get a very good return on your investment. You may don’t have time to research on deciding which stocks you should buy. In such case, you can do so via Mutual fund through Systematic Investment Plan. This will make you use the benefits of cost averaging and compounding.
5. Exchange traded funds and index fund
Exchange traded funds and Index fund may further lower the risk of volatility through low-cost options. The essence is that such options reward better return than a savings bank account. However, all such options are not for everyone.
6. Other options
The other mode of investment may be small saving investments. As for example RBI’s 8 % Savings bond, Post office Time Deposit, Post office NSC / KVP etc. The interest earned from all the above-mentioned income is fully taxable. These sometimes may change or may not change due to different government policies related to these schemes.PPF and EPF are some schemes which are nontaxable. But these are not popular instruments due to liquidity restrictions as compared to above-discussed options.
Savings bank accounts could make a sense in term of liquidity perspective. But it definitely would be nonsense savings in terms of the generated returns. Especially in the current scenario when one can switch funds from here to there in a minute. Just with the help of finger touch and that too thinking much about its liquidity compulsion.