Savings account vs liquid mutual fund: which is better?

Most savings bank account holders leave excess amounts in their bank accounts. Should they park their excess money in liquid funds instead?

(L-R) Surinder Chawla, Lovaii Navlakhi, Virat Diwanji, Dilshad Billimoria

Surinder Chawla, head–branch and business banking, RBL Bank

You should leave as much in your savings account as you are comfortable with. This amount will depend on many things like daily cash requirements and your own cash flows. Typically, we have noticed that for an individual’s savings account, the balance is usually just slightly higher than the monthly salary credit. Very often, individuals also transfer further money into their primary savings accounts, since that account is usually linked to their monthly recurring expenses and/or investments. Savings accounts offer liquidity and also a reasonable interest rate to the customers. Therefore, many customers park as much money as they can in their savings accounts; from which they meet their regular expenses and investments, and which also serve as their emergency buffer fund. Some of the other financial instruments, which offer higher returns, may not be as liquid as money in a savings account. In many cases, such instruments come with certain risk factors, which the individuals have to understand clearly. The primary reason of putting money in a savings account is liquidity and ease. In a deregulated savings interest rate environment, several banks are offering attractive interest rates (on savings accounts). Therefore, there is scope to get attractive interest rates while maintaining liquidity at all times.

Lovaii Navlakhi, managing director and CEO, International Money Matters

A savings account is just what the name suggests, and is not an investment account. Customers may see some amount of comfort in seeing a certain amount of money in their bank account, especially when they know that the money can be accessed or used as per their free will, at a time of their choosing. The reason why the money accumulates in bank accounts is that there is no known alternative. Wouldn’t it be wonderful to have the liquidity that one requires, and also make some returns? I recommend that one should keep 1 month’s expenses in the savings bank account, and 3-6 months’ regular expenses in a liquid mutual fund. You can also add the known immediate expenses to this figure. Earnings would be by way of dividends, which are tax free in the hands of the investor; and even after dividend distribution tax, post-tax returns are better than from a savings bank. The liquid funds can be exited overnight, with no exit loads. Their greater benefit is that they create the discipline of not keeping excess or unproductive money; and consciously looking at one’s long-term goals to invest for the future. If you haven’t tried such products earlier, take help; invest a part of the excess—and withdraw it—to validate the process; and sleep peacefully knowing that while you are idling, your money isn’t.

Virat Diwanji, senior EVP, head-branch bank-ing, business assets and NR, Kotak Mahindra Bank

Usually the rule of thumb that we tell customer to follow is to leave 2-3 months’ expenses in the savings bank—the amount for which you need absolute liquidity. Hence, that is the amount you should have in your savings account. Most people usually do that. Interest rates do not play a significant role in an individual’s decision to leave the money in a savings account but it does play a role. People do start comparing with the alternative options. Hence, the evolved customers would look at something where they can get more than what they earn in a savings account. But the bulk of customers are not so evolved. In that sense, the absolute interest rate in a savings account would make a difference. Hence, customers will tend to consolidate their idle balances in savings accounts, to one where the interest rate is higher. They would not say that since the interest rate is higher, I may keep 5 months’ expenses instead of 3 months’ expenses. They will not do that. But the tendency is to consolidate where the interest rates are higher. You can take the example of sweep facility, where there is a threshold on the amount. For instance, I have Rs300 and the threshold is Rs150 for savings account. The remaining Rs150 would be moved to a time deposit, which gives higher interest rate than a normal savings account.

Dilshad Billimoria, director, Dilzer Consultants

The rule or advice we give clients about keeping money in the savings bank account is to keep 4-8 months’ fixed expenses and the important commitments like equated monthly instalments, to protect the primary income earner and her family against unforeseen circumstances such as job loss, medical emergencies and financial emergencies. If both the spouses are working, we recommend 4-6 months of expenses and if there is only one breadwinner, we recommend 8-9 months. Anything more in the savings bank is an opportunity cost, loss of interest income, and negative returns; if inflation-adjusted returns are considered. The effect of interest rate changes on savings accounts and flexi-fixed deposits are neutral. A small change in the bank rate will not change the interest rates on savings account and short-term fixed deposits. Investing in a liquid fund will make sense only when the investable surplus is large. If investors seek to park funds for 1-8 months and want access to these funds in the short run, it is better they stick to short-term fixed deposits, since the post-tax implication on fixed deposits and liquid or ultra short-term funds for this tenure is the same. Hence, there is no benefit in a liquid fund over a short-term fixed deposit, if the amount is small and the period of parking is short.

First Published: Mon, Jun 26 2017. 04 57 PM IST

30 June 2017