Are you leaving your money idle in a savings account? 12th February 2008

• Read more articles

I am sure all of us have a savings bank account and all our salaries or professional income (take home) is deposited there every month. And many of us may not be aware that the interest that we get on our savings account balance is only on the minimum balance from 10th and the last day of that month.

For instance if you deposit Rs 100,000 on 11th of a month and if your balance has been Rs 1,000 before the deposit, you will get interest on minimum balance of Rs 1,000 at the rate of 3.50% pa. Suppose you start the month of July with an zero balance And say you deposit a sum of Rs 1,000 on 11th July and withdraw it on 31st of August (after 51 days), you get 0% interest on that amount for 51 days! Since in both the months, July and August from 10th to 30th, the minimum balance was zero.

Who gains out of this? It's your Bank, free money for them to lend at higher rates.

It is also pertinent to add here that though interest on savings account is computed on a per month basis, it is finally credited into the bank account after every three months, if not more. So no compounding effect. And the interest so received is taxable at the applicable rates. So the income earned on savings account net of tax is very low, may be less than 2%, and imagine the inflation is close to 4.00%. So in fact you are losing.

So then why do we still prefer keeping our surplus cash in savings accounts?

May be due to:
1. Lethargy to invest the money somewhere else.
2. Don't know about similar products
3. Safety of capital in savings account.
4. Anytime withdrawal.

Ideally all of us have an estimate of our monthly expenses such as; children school fees, electricity bills, loan installments, groceries etc. The balance available after that is usually known as our 'Monthly Savings'. We use the savings in various ways by investments like stocks, bonds etc and or usually bank fixed deposits. After these investments or any other expense, we may also leave some money say 5-10% of our monthly gross salary "lying idle" in the savings account to meet any contingency.

But more often than not, we find a larger than required cash balance in our savings account. Cash management has been an issue for most of us, especially in the short term.

If a person has surplus cash how can he make the most of it?

We have banks, but they offer limited options. A fixed deposit would be attractive only in the medium to longer term due to the penalty on pre-mature withdrawal, so your money is locked; the interest on bank deposits is taxable too. Savings and current accounts, as we now know, though liquid, do not offer attractive returns. Investing in shares, bonds etc for such a short term drives up the transaction costs and carries the risk of losing capital.

So if you have an alternative to invest your surplus cash which retains all the features of a savings account (easy liquidity, relative safety of principal) and yet offers you a higher and better post tax return, would you want to know more about it? Read on.

Quantum Liquid Fund is the ideal option.

Liquid Funds are part of the debt schemes offered by mutual funds in India and regulated by SEBI. They seek to offer optimal returns with moderate levels of risk and high liquidity. Though liquid funds do not guarantee the capital, the chances of capital loss are minimal as it generates income primarily on interest accrual. They are an ideal solution for parking surplus funds for short period of times, at better after tax yields than bank savings and fixed deposits.

You can invest in liquid funds even for a day.

Money at Short Notice. Liquid funds typically offer redemption on a T+1 basis (i.e if you give your redemption request on any business day before 3 pm, you could usually receive your money the next business day, with the use of appropriate banking channels, We would endeavor to achieve this timeline, though the regulations allow a ten day period. Liquid funds accept subscription and gives redemption only though banking channels. (They do not deal in cash).

Why Quantum Liquid Fund (QLF) -

• Better tax efficiency - Unlike interest on bank deposits, dividends declared by mutual funds units are exempted from tax in the hands of recipients. However a effective dividend distribution tax of 22.06% is paid by the fund and is loaded in the NAV. In effect the daily dividend re investment plan of QLF, compounds the returns on a daily basis, since your daily interest accrual gets you more units everyday. In such plans the NAV remains almost constant and the number of units rises due to dividend being reinvested.
  

• Low cost - QLF does not charge any Entry and Exit load. And since it does not use distributors to market its fund it has a lower expense ratio of 0.45% p.a.
  

• Superior portfolio quality - The QLF is mandated to invest a minimum of 80.0% of its portfolio in instruments with the highest credit rating as assigned by a SEBI registered credit rating agency.
  

• Lower risk of capital losses - QLF can invest less than up to 10.0% of its portfolio in assets with higher risk. As of date, the scheme has never had exposure to securities which need to be marked to market. This leads to lower volatility in the NAV and ensures stable performance which ensures that the risk of losing capital is very low.