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Banks Cut Deposit Rates: Where To Invest?

IndianMoney.com Research Team | Updated On Thursday, August 17,2017, 06:34 PM
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Banks Cut Deposit Rates: Where To Invest?

 

If you read the daily newspapers the first thing you will see, Banks are cutting interest rates on savings bank accounts. SBI, India's Number 1 lender, has cut interest rates on deposits made by you and other investors in SB Accounts from 4% to 3.5% on balances below Rs 1 Crore. SBI kick started the process which was soon followed by other major banks.

Bank of Baroda, Axis Bank and Indian Bank cut interest rates offered on savings bank accounts from 4% to 3.5% on deposits in savings bank accounts up to Rs 50 Lakhs. Now there's more bad news coming. Two major private sector banks have also cut interest rates offered on SB accounts. HDFC Bank has cut interest rates offered on savings bank accounts from 4% to 3.5% on deposits up to Rs 50 Lakhs. Yes Bank has reduced the interest rate on SB accounts from 6% to 5% for deposits of less than a Lakh.

You have a big problem. Most banks are cutting interest rates offered on deposits made in SB accounts. Where will you keep your money? Want to know more on mutual funds? We at IndianMoney.com will make it easy for you. Just give us a missed call on 022 6181 6111 to explore our unique Free Advisory Service. IndianMoney.com is not a seller of any financial products. We only provide FREE financial advice / education to ensure that you are not mis-guided while buying any kind of financial products.

 

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Banks Cut Deposit Rates: Where To Invest?

 

The problem of low interest rates does not lie with SB accounts alone. Banks are cutting interest offered on fixed deposits. The Government has cut interest rates on PPF and NSCs by 10 basis points. An investment in PPF and NSCs will earn only 7.8%. If you are a senior citizen looking to invest in the senior citizen's savings scheme (SCSS), you are in for a nasty surprise. SCSS offers an interest of 8.3%, from its earlier offering of 8.4%. Now to the big question. Where to put your money?

 

1. Should you invest in liquid funds?

 

A liquid fund is nothing but a debt mutual fund scheme. It invests your money in money market instruments like certificates of deposits, treasury bills, commercial papers and even term deposits. If you invest in liquid funds, you get higher returns than a savings bank account.

Before investing in liquid funds you have a question to answer. Why are you leaving your hard earned money in a savings bank account? The simple answer...Liquidity. You can withdraw money from your savings bank account in minutes as and when you need the money. This ease of use makes you careless with the money and you are willing to accept even 3.5% a year on the money stored in the savings bank account. Besides, there's no risk on this investment.

Now consider this. Liquid funds are using technology to make sure you can redeem your money in minutes. You can withdraw Rs 50,000 a day or 90% of your folio, whichever is lower as per SEBI rules. You can reasonably expect your liquid funds to return around 6-7% returns in a year. This is a good 2-3% more than what you are getting on your SB accounts. Yes, liquid funds do have a measure of risk, but its minimal.

Don't you think an investment in liquid funds is better than leaving money lying in an SB account?

 

2. Should you invest in debt funds?

 

Debt funds are a type of mutual fund which invest your money in bonds or deposits to generate returns. A bond is just like a certificate of deposit which is issued by the borrower to the lender. The Government of India issues bonds and debt funds invest in these bonds. Interest is paid on these bonds.

Government of India bonds are sovereign rated (guaranteed by the Government) and are a very safe investment. Debt funds also invest in bonds of large and medium sized companies which give higher returns than government bonds, but are more risky. The debt fund passes the interest earned on its investments to you. It's reasonable to expect around 8-9% a year from an investment in debt funds. Debt funds can be risky and there are times when you get lesser returns than  fixed deposits, but they could also give higher returns than FD's.

Are debt funds better than FD's? Debt funds are better than FD's when it comes to taxation. The interest you earn from FD's is added to your taxable income and you are taxed as per the income tax bracket you fall under. If you fall in the 30% tax bracket, you lose a lot of money in tax.Taxation on debt funds is similar to FD's, if you stay invested for less than 36 months.

The difference...If you sell investments in debt funds after 36 months, your returns/gains are called long term capital gains, or simply LTCGs. LTCGs are taxed at 20% with the indexation benefit. Indexation allows you to inflate the purchase price using cost Inflation Index (CII). The purchase price of the debt fund is increased (adjusted for inflation) and deducted from the sale price to calculate LTCG. This brings down your taxable income and debt funds help you save tax.

FD's are safer than debt funds but debt funds can give you higher returns than FD's. If you fall in the higher tax brackets then debt funds help you save tax.

You now have an idea where to invest your hard earned money. You don't have to leave your money lying in an SB account.  So banks cutting interest rates offered on SB accounts should not bother you. Be Wise, Get Rich.

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