Tuesday, August 4, 2015

Savings Bank account is not yet dead

In one of the forum, there was this query – “I have 10 lakh rupees available. I wish to consume this in a month. So please suggest an investment vehicle for 3-4 weeks maximum”.

Answer to this question varies and depends upon the end user and advisor’s recent experiences and rarely on the exact requirements.
The more convenient answer to this question would be “keep it as cash in your pocket” or “in Saving Bank account”. However, people do not want to hear these answers.

The savvy investors come up with a plan. They advise not to keep this cash in SB account as it will give negligible amount of interest. So keep it in short term debt funds or liquid funds.
The pros of keeping your money in liquid funds are:
  • It earns almost double of what a savings account offers
  • Negligible market risk
  • Money is available in T+1 day
Let us see these points one by one:

  • When we say double of savings account, it should be around 8%. If we check the CAGR of most of the liquid funds, it varies from 7 to 9%. So this point is true. Taxation point of view, tax is applicable in both the cases and would be around same percentage.
  • Negligible market risk. This is partially true and can negate the first advantage. When AMC says ‘negligible market risk’, it simply means that that there is negligible risk that your ‘capital’ would be eroded by the market volatility. This essentially, hides the fact that – “the returns will be impacted by the market volatility”. So due to market fluctuations, your returns might be similar to a normal saving bank account i.e. 4%
  • Money is available in T+1 day implies, money is available to you on the next day of which you processed the request for the redemption. Again, the catch is, you have to put the request before cut off time, which is usually 3pm. If you request, before 3pm, in most probability, you will get money by next day (in your same saving account from which you deposited).  If you cross the 3pm mark, you will get your money on day after tomorrow.


All these things are fine till you consider the psychological advantage that your savings account or simply staying cash gives you. You are completely saved by an additional work of opening the new folio with any AMC. What if you already have a folio? Still, you would have to take the pain of understanding the  nature of the fund, compare the returns of various liquid funds (because that’s the point which really differentiates from savings account), buying units, then keeping track of your new investment for 1 month and finally, remembering to redeem it before 3pm to have it in T+1 day.


Considering that you will be investing this money only for 1 month, the additional (4% per annum i.e. 4% /12 months) does not justify the additional work to be done. Suddenly, what if your requirement reduces by 10 days? Your gains are reduced by that much amount.
Moreover, till now, we have considered that the investor is a direct investor and he is tech savvy to do the things online. What if he goes through agent? Simple, the additional gains will be going towards agent commission. What if he is direct investor but not tech savvy? He has to take leave from office, visit the AMC branch, do all the paper work, issue checks (which again takes at least 1 day to clear), take auto/bus (which reduces the gains) and lot of mental work.
The investor, who asked this question, would have surely wasted 2 days (if not more) in putting the query on facebook and then waiting for the responses. Then cross check each response and verify it with the authorities (read Pattu or Ashal), bear the sarcasm from the Guru (Subra) and go through above work. This all just for miniscule (4%/12 months) gain.
Conclusion: If your require money is such a short duration, do not go for any fancy names. Your Saving Bank account is not yet dead. Stick to it. The returns might be little less than what mutual fund offers. However, the mental peace is priceless. Keeping it simple is the key.
P.S.: Just out of curiosity, if we think little more, the possible scenarios for requiring so much money in a definite time (for a normal person) is:
  • The big daddy – Real Estate investment. His downpayment must be scheduled after 1 month. In this case, instead of thinking to earn from liquid funds, one can negotiate with builder saying, I can arrange for money sooner. In return, can I get some discount or little more amenities or upgraded tiles or something like that [Related: Remember, while buying house]
  • Medical treatment of some relative – assuming that medically ill person cannot post this query; the other possibility is he needs it for some relative or friend. Again, in this case, instead of wondering how to earn some interest, he can choose to spend time with them and comfort them
  • Buying a car – similar to real estate investment, the price of car or other accessories can be negotiated for quick payment [Related post]
  • Starting a small business – it is beyond words to understand how much mental peace is required in this case


2 comments:

  1. As a financial planner, I totally understand where you're coming from.
    I read your site fairly often and I enjoy your posts.
    I shared this on twitter and my followers enjoyed it too.

    Kepp up the good work!

    ReplyDelete