Skip to main content

Don’t Keep Cash Idle In Banks

The Reserve Bank of India (RBI) released discussion papers on savings rate deregulation last week. The apex bank has given time for public comments till May 20, and will decide the further course of action based on the feedback. In the Annual Credit Policy on May 3, the bank raised interest rates on savings bank deposits by 50 basis points (0.5 per cent) with immediate effect. So, savings bank account holders will now earn four per cent on their balance, instead of 3.5 percent earlier.

Even if the rise is being considered a precursor to deregulation, bankers aren't sure when the latter will be implemented. Over time, RBI has deregulated all other rates, except savings bank rates across banks. The last time RBI mandated a change in the savings bank rate was 2003.

In the present high interest rate environment, deregulation or freeing rates would mean an interest higher than the four per cent on your savings deposit. Each bank would decide on its own rate of interest on savings accounts. For customers, it means being able to pick and choose the best rate available in the market. However, this could lead to unhealthy competition in the banking industry.

At the same time, interest rates will have to go well above inflation for real gains. Interest rates on savings deposits have mostly yielded negative returns, given that inflation has been soaring for almost a year. RBI expects inflation to fall back to six per cent only in March 2012. It means even the new rate of four per cent will yield negative returns.

Therefore, this option should not be used for investment. At best, you can keep you emergency funds in savings account.

For the risk-averse, investment could be done in other better return yielding avenues such as fixed deposits (FDs).

At present, State Bank of India is offering 7.75 per cent on a one-year deposit and the highest 9.25 per cent on a 555-day deposit. ICICI Bank is giving 7.50 per cent for one year and 9.25 per cent for 590 days. Lakshmi Vilas Bank is offering 10 per cent for one to two years.

And, with RBI raising key policy rates, FD rates may go up further. For instance, IDBI Bank raised deposit rates by 50 basis points following the announcement.

Debt funds are another option for those with lower risk appetite. Debt funds such as liquid, liquid-plus or ultra short-term schemes with lower maturity are giving above average returns in the present high interest rate regime. And, this is only likely to benefit with RBI's last rate increase.

At present, ultra short-term funds have returned 6.65 per cent in the last one year, according to mutual fund tracking agency, Value Research. They invest in debt and money-market instruments with a maturity ranging from 90 days to one year. Although they are riskier than liquid funds, investors get better and more tax-efficient returns. Funds have given 6.57 per cent.

Short-term funds investing in debt and money market instruments for one-two years have offered 5.48 per cent. Short-term debt funds will give better returns because of the constant churn that fund managers have to do. Income funds have returned 5.08 per cent.

Gilt funds have given over four per cent. These primarily invest in government securities issued as a part of the government's borrowing programme. Best for those who seek safety and liquidity, the downside is that their prices fluctuate sharply due to higher sensitivity to interest rate movements.

Those with slightly higher risk-taking ability could invest in debt-oriented hybrid funds, which invest up to 65 per cent in debt instruments and remaining in equity. Thus, protecting the downside and giving the equity boost to your portfolio. Debt-oriented hybrid funds have returned 5.46 per cent in past year. These will also give tax benefit of 10 per cent without indexation and 20 per cent with indexation.

Though the savings rate has been increased, it's better to keep money invested in higher paying instruments

In the Annual Credit Policy on May 3, the bank raised interest rates on savings bank deposits by 50 basis points with immediate effect. So, savings bank account holders will now earn four per cent on their balance, instead of 3.5 per cent earlier.

High inflation will erode high returns from savings account

Savings account not for investment; at best for emergency funds

Risk-averse investors could invest in fixed deposits; annual returns = over nine per cent (average)

Rise in policy rates will push up fixed deposit rates further

Debt funds are another option; annual returns = 6.50 per cent

Those with higher risk taking ability could invest in debt-oriented hybrid funds

Popular posts from this blog

Tata Mutual Fund

Being a part of the Tata group, the fund has the backing of a very trusted brand name with strong retail connect. While the current CEO has done an excellent job in leveraging the Tata brand name to AMC's advantage, it is ironic that this was just not capitalised on at the start. Incorporated in 1995, Tata Mutual Fund remained an 'also-ran' fund house for around eight years. Till March 2003, it had a little over Rs 1,000 crore in assets and 19 AMCs were ahead of it. But soon after that the equation changed. It was the fastest growing fund house in 2004 and 2005. During these two years, it aggressively launched six equity funds, two debt funds and one MIP. The fund house as of now stands at No. 8 in terms of asset size. This fund house has a lot to offer by way of choice. And, it also has a number of well performing schemes. Tata Pure Equity, Tata Equity PE and Tata Infrastructure are all good funds. It also has quite a few good debt funds. The funds of Tata AMC are known to...

What is Financial Freedom?

Invest In Tax Saving Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Buy Gold Mutual Funds Call 0 94 8300 8300 (India)     There were many things common between our Freedom fighters. All had the Single vision (Free India), common goal (independence) and had a disciplined and focused approach. They were ready to do anything and everything and had made so many sacrifices to see India free . But the road to freedom was not easy .They had faced lot many hardships, went to jail so many times and even confronted physical and mental torture from the British. There was one more thing which proved to be an advantage to our fighters that most of them were professional lawyers. The knowledge of legal issues and its impact on our country at large has helped them counter various bills and proposed new laws by the then government. It is due to their continuous effort that we are able to achieve the goal of Independent Indi...

UTI Mutual Fund

Even though only a few of UTI’s funds are great performers, this public sector fund house has many advantages that its rivals do not. It has a huge base of retail equity investors and a vast distribution network. As a business, it looks stronger than ever, especially in the aftermath of credit crunch. UTI is, by a large margin, the most profitable fund company in the country. This is not surprising, since managing equity funds is more profitable than debt. Its conservative approach and stable parentage is likely to make it look more attractive to investors in times to come. UTI’s big problem is the dragging performance that many of its equity funds suffer from. In recent times, the management has made a concerted effort to improve performance. However, these moves have coincided with a disastrous phase in the stock markets and that has made it impossible to judge whether the overhaul will eventually be a success. UTI’s top performers are a few index funds, some hybrid funds and its inf...

Debt Funds - Check The Expiry Date

This time we give you an insight into something that most debt fund investors would be unaware of, the Average Portfolio Maturity. As we all know, debt funds invest in bonds and securities. These instruments mature over a certain period of time, which is called maturity. The maturity is the length of time till the principal amount is returned to the security-holder or bond-holder. A debt fund invests in a number of such instruments and each of these instruments would be having different maturity times. Hence, the fund calculates a weighted average maturity, which would give a fair idea of the fund's maturity period. For example, if a fund owns three bonds of 2-year (Rs 30,000), 3-year (Rs 10,000) and 5-year (Rs 20,000) maturities, its weighted average maturity would be 3.17 years. What is the big deal about average maturity then, you may ask. Well, knowing a fund's average maturity is important because it tells you how sensitive a fund is to the change in interest rates. It is ...

Salary planning Article

1. The salary (basic + DA) should be low. The rest should come by way of such allowances on which the employer pays FBT and you don't pay any tax thereon. 2. Interest paid on housing loan is deductible u/s 24 up to Rs 1.5 lakh (Rs 150,000) on self-occupied property and without any limit on a commercial or rented house. 3. The repayment of housing loan from specified sources is also deductible irrespective of whether the house is self-occupied or given on rent within the overall ceiling of Rs 1 lakh of Sec. 80C. 4. Where the accommodation provided to the employee is taken on lease by the employer, the perk value is the actual amount of lease rental or 20 per cent of the salary, whichever is lower. Understandably, if the house belongs to a family member who is at a low or nil tax zone the family benefits. Yes, the maximum benefit accrues when the rent is over 20 per cent of the salary. 5. A chauffeur driven motor car provided by the employer has no perk value. True, the company would...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now