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

Mutual Fund Review: Religare Tax Plan

Tax Plan is one of the better performing schemes from Religare Asset Management. Existing investors can redeem their investment after three years. But given the scheme's performance, they can continue to stay invested   Given the mandated lock-in period of three years, tax saving schemes give the fund manager the leeway to invest in ideas that may take time to nurture. Religare Tax Plan's investment ideas revolve around 'High Growth', which the fund manager has aimed to achieve by digging out promising stories/businesses in the mid-cap segment. Within the space, consumer staples has been the centre of attention for the last couple of years and can be seen as one of the key reasons for the scheme's outperformance as compared to the broader market. It has, however, tweaked its focus and reduced exposure in midcaps as they were commanding a high premium. The strategy seems to have worked as it returned a 22% gain last year. Religare Tax Plan has outperformed BSE 100...

Mutual Fund Review: L&T MIP

        This fund won't deliver chart-topping returns. However, over the long run it will not disappoint and end up beating the category average The fund has seen numerous changes at the helm. When Katare took over in October 2007, he made dramatic alterations to the portfolio. On the equity side, he increased the number of stocks to 11 (November) from 2 (September). On the debt side, he added Certificates of Deposit (CDs), while earlier Treasury Bills (T-Bills) and cash accounted for 88 per cent (September 2007) of the portfolio. In November 2007 he exited T-Bills for good. The results impressed. In the last quarter of 2007, it delivered 12.83 per cent (category average: 6.12%). In 2008, the first quarter performance was nothing short of impressive, a return of 9.93 per cent (category average: -3.97%). While other players increased their portfolio maturity, Katare maintained a low maturity profile. While the average maturity of the category was 2.81 years that quarter, th...

Mutual Funds: Past Performance is not just everything

Many a times your agent / distributor / relationship manager tries to push you some mutual fund schemes by enticing you with a typical sales pitch…"Sir, this scheme has generated 20% returns in the past one year." And this sales pitch often gets louder when the market conditions have been favourable. Some of the agents / distributors / relationship managers have another unique way of luring you. They say, "Sir / madam this scheme has been awarded the best scheme award in the past by a leading business channel"... And hearing all these sales talks you investors very often get attracted and sign a cheque in favour of the respective scheme.   But please ask yourself do you hear these sales talks when the capital markets turn turbulent? Why is it so that your agent / distributor / relationship manager avoids talking to you during turbulent times of the capital markets and doesn't boast about returns generated by the respective funds or awards being conferred on t...

Reconfigure investments to reap benefits in DTC

    Investing for tax benefits under the new Direct Taxes Code ( DTC ) will be different in several ways from what taxpayers are familiar with right now. This will require some reconfiguration in the nature of investments for the investor and they need to be ready to tackle the changes that will come about once the new DTC is implemented from financial year 2012-13.One area of interest for most taxpayers is the manner in which they can extract the maximum tax benefit. Here is a look at the situation and also how it changes from the existing position. Basic deduction: At present, there is a deduction of Rs 1 lakh that is available for an individual when they make investments under specified areas such as provident fund, public provident fund, national savings certificates, equity linked savings scheme and insurance premium, among others. This benefit is available under Section 80C of the Income Tax Act. This has been replaced by a new Section 68 under the DTC where there is a deduct...

JP Morgan ASEAN Offshore Fund

  JP Morgan ASEAN Offshore Fund - Invest Online JP Morgan ASEAN Offshore Equity Fund is an international equity mutual fund scheme that invests primarily in companies of countries which are part of the Association of South East Asian Nations (ASEAN). Most international funds , apart from those focused on the US market, have been struggling for sometime. This is because of the uncertainties in the global market. International funds are meant for investors who want to diversify their investments across geographies. If you haven't made your investment for this diversification, you should sell your investments in this scheme.   Best Tax Saver Mutual Funds or ELSS Mutual Funds for 2015 1. BNP Paribas Long Term Equity Fund 2. Axis Tax Saver Fund 3. IDFC Tax Advantage (ELSS) Fund 4. ICICI Prudential Long Term Equity Fund 5. Religare Tax Plan 6. Franklin India TaxShield 7. DSP BlackRock Tax Saver Fund 8. Birla Sun Life Tax Relief 96 9. Reliance Tax Saver (ELSS) Fund 10. HDFC TaxSaver...
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