Is Gold Cheap or Oil Expensive?

I am sure all of us have a savings bank account and our salaries or professional income is deposited there every month. And many of us may not be even aware that the interest of 3.5% p.a. that we get on our savings account balance is only on the minimum balance between the 10th and the last day of that month.

For instance if you deposit Rs 100,000 on the 11th of a month and if your balance has been Rs 1,000 before the deposit, you will get interest on the minimum balance of Rs 1,000 at the rate of 3.50% pa. Suppose you start the month of July with a 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 31st the minimum balance was zero.

Who gains out of this? It's your Bank, free money for them to lend at higher rates and in some cases, right back to you, as your housing or car loan at 11.0%.

It is also pertinent to add here that interest on the savings account is computed on a simple interest basis, and is finally credited into the bank account at the end of each calendar quarter. So there is no compounding effect. And more so, the interest income so received from your savings account balance is taxable at the applicable rates. So the returns earned on your savings account balance net of tax is very low, and can be around 2% . Shocked?

Now what if we tell you that at the current level of Annual Inflation of 12.0%; your real post tax return from the savings account balance is -10%; (yes negative 10%).

* - Assumed at the highest Tax plan for Individuals; + - Effective Dividend distribution tax paid by the fund out of the investors NAV. Source for bank deposits: Average indicative of various Banks; ** - 1 year returns as of 29-July-08 for the QLF as per valueresearchonline.com

Ideally all of us have an estimate of our monthly expenses such as; electricity bills, loan installments, groceries, school fees etc. The balance available after meeting our regular expenses equals our 'Monthly Savings'. Some of these savings are invested in investment avenues like mutual funds, bank deposits, stocks etc. The remaining monthly savings tends to keep accumulating in the savings account month after month.
But more often than not, we find a larger than required (more than what we may keep aside for emergencies or contingencies) cash balance in our savings account.

• Lethargy to look for an altenative investment avenue.
• Lack of awareness about superior investment options.
• Safety of capital in savings account.
• Liquidity of Anytime withdrawal.

You can invest in liquid funds even for a day.
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, the payment proceeds are dispatched on the next business day or a direct credit is made into your account (available through select banks ), You can invest in Liquid funds only through direct transfers, local cheque or demand draft. (no cash is accepted). Quantum Liquid Fund - a low cost Liquid Fund from Quantum Mutual Fund is an ideal investment for you to park the short term surplus funds lying in your savings account.

• Better tax efficiency - Unlike interest on bank deposits, dividends declared by mutual funds units are exempt from tax in the hands of recipients. However an effective dividend distribution tax of 22.06% is paid by the fund and is accounted for in the NAV.

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

• Superior portfolio credit quality - QLF is mandated to invest a minimum of 80% of its portfolio in debt instruments with the highest credit rating as assigned by a SEBI registered credit rating agency. ( i.e. AAA / P1+ )

• Lower risk of capital losses - 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.

• Superior performance of Liquid Funds during rising interest rates - Liquid funds invest in short term fixed income instruments; the returns on a majority of these would move in line with the direction of interest rates. So in a rising interest rate scenario Liquid Funds like Quantum Liquid Fund are likely to give better returns than other debt mutual fund schemes.

• Disciplined Research and Investment Process has enabled QLF to deliver consistently superior returns since our inception.

Above article is authored by Quantum.

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