A Savings Account is a type of bank account which is used to deposit money. Interest is earned on the account over a period of time. It is an account where one deposits money for saving and thus, the name savings account. It is one of the simplest types of bank accounts which allows you to store your extra cash and also earn interest on it. These days one can open an online savings account with a bank, start saving and earning interest. Customers usually prefer high-interest saving accounts. Different banks provide different savings account interest rates. With your saving account, you can transfer funds and withdraw money any time you want.
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As said above, savings account interest rates are different for different banks. The usual range of savings account interest rates varies from 4%-7% per annum.
As per the latest RBI mandate, interest on your saving account is calculated on a daily basis. The calculation is based on your closing amount. The interest earned will be credited half-yearly or quarterly depending upon the account type and bank's policy.
Monthly Interest = Daily Balance x (No. of days) x Interest Rate/ Days in the year
For example, if we assume that the daily closing balance is daily 1 lakh for a month and the interest rate on the savings account is 4% p.a., then as per the formula
Interest for the month = 1 lakh x (30) x (4/100)/365 = INR 329
So with so much of idle cash lying around and low savings account interest rates, how can you get more from your bank account? Naturally, the answer is to invest your money. But if you don't want to take high risks and prefer playing safe, let's look how you can get more from your savings account.
Most of us park a significant chunk of our spare money in the bank with lower savings account interest rates and thus earn less from the idle cash. On the other hand, Liquid Funds offer much better interest rates than the savings account interest rates with almost similar risk level and a better option to earn money.
Liquid funds or liquid Mutual Funds is a type of Mutual Fund that primarily invests in money market instruments. It involves Investing in financial instruments like treasury bills, term deposits, certificates of deposits, etc. These instruments have a lower maturity period(less than 91 days) which ensures that the risk level in these Types of Mutual Funds is minimal.
These Mutual Funds have no lock-in period and withdrawals are generally processed within 24 hours on a working day (or lesser in some cases). There is no entry load or exit load attached to these funds and interest rate risk is negligible due to the type of instruments in the fund.
Liquid funds offer better returns for short-term investment during a high Inflation market environment. During such periods, interest rates are high and this, in turn, ensures better returns for liquid funds. Liquid funds are available in the market in form of various options such as daily/weekly/monthly dividend (payout or reinvestment) and growth option.
Liquid funds, on an average offer interest rate of around 7% to 8% per annum. This is considerably higher than the savings account interest rates. For investors wanting steady cash flows, they can opt for dividends which will be credited to their account as per their choice. Some of the best performing liquid funds that have delivered constant returns are as follows:
Fund NAV Net Assets (Cr) 1 MO (%) 3 MO (%) 6 MO (%) 1 YR (%) 2018 (%) Debt Yield (YTM) Mod. Duration Eff. Maturity DHFL Pramerica Insta Cash Fund Growth ₹247.036
₹891 0.6 1.8 3.7 7.6 7.4 7.13% 1M 13D 1M 13D JM Liquid Fund Growth ₹51.9788
₹2,351 0.6 1.8 3.6 7.5 7.4 7.25% 1M 28D 1M 28D Indiabulls Liquid Fund Growth ₹1,850.84
₹4,735 0.5 1.7 3.5 7.3 7.3 0% Principal Cash Management Fund Growth ₹1,685.42
₹246 0.5 1.6 3.3 -2.1 -1.8 6.89% 21D 22D Reliance Liquid Fund Growth ₹4,633.75
₹34,422 0.6 1.8 3.6 7.5 7.4 0% Note: Returns up to 1 year are on absolute basis & more than 1 year are on CAGR basis. as on 14 Jul 19
Liquid funds offer significant tax advantage over savings account. The taxation of liquid funds for capital gains is 30% for less than 3 years and 20% with indexation for more than or equal to 3 years as per current tax laws. Due to this lower tax incidence, the net yield on the liquid funds is higher for most cases than a savings account. For short tenures, one can get taxed on dividend on liquid funds at 25%. This leads us to the conclusion that in most cases the yield on liquid funds is higher than the savings account. Moreover, this is also dependent on the customer's ability to take the risk involved in the products.
Naturally, to get more out of your savings account, you need to invest money. Savings account interest rates offer lower returns compared to what liquid funds offer. Thus, liquid funds offer a substantially better option to make the most out of the idle cash with similar risk, but almost double the returns. It's time you tried something new and better that will significantly get more out of your normal savings bank account.