Where to keep idle cash? in Banks due to increased interest or in Liquid funds?


RBI has already given green signal for all banks to decide about interest rate on deposits in savings account. (De-regulation of interest rates on SB accounts). Though it has given direction  theoretically for all banks to keep interest rate on SB a/cs upto one lakh constant for all, some banks have not heeded the advice. Now Yes bank and Kotak bank have  indicated 6% interest on SB a/cs , Indus ind bank also followed suit in giving interest rate of 5.5%.  But most of the banks are jut watching the situation as already they are giving 4% interest rate.  This increase dealt a blow to liquid funds where one can get interest upto 8-8.5% and it is subject to fluctuations. Now some may ask whether we can go in for bank SB a/c where 6% interest is offered or liquid funds?

Liquid funds are choice of investors for better return and it is kept above savings account but below fixed deposits. Liquid funds and savings accounts funds are almost similar in quickness in drawal of money as compared to fixed deposits. The liquid fund returns are in the range of 8% to 9% per annum. This is higher than savings bank interest rate but slightly less than fixed deposits.  But one can withdraw savings bank money at any time with some limited withdrawals. It is giving best liquidity.

The second best liquidity will be liquid funds where we have to wait for a day to get our funds to our credit. Mostly all liquid funds have a daily cut off time of 3 pm for withdrawal or deposit.Few have different timing.  If we invest our money before 3 pm, then the money will be invested on that day’s NAV(net asset value) and our returns starts from next day. Every day evening, NAV ‘s are announced by funds in the evening. In the same way, if we want to take out our money, we need to put our redemption request before 3 pm. The redemption amount will be calculated as per the closing day NAV and the money will be credited in the next day in the  bank of ours. If the deposit/withdrawal is after 3 pm, then the next day NAV will be considered for all purposes and one more day will be taken. This process will be simple if we opt for online transactions and register for the same with the funds concerned. This will help us not to fill up any forms or wasting our time to go to fund houses or talk to someone etc. Also deposit /withdrawal are all can be done easily on online using our online bank account.  So online facility makes the operation simple and it is beneficial more than savings accounts.

Regarding safety of liquid funds, the fund managers are to follow the SEBI rules and as per that, they can invest only in fixed income instruments that are less than 91 days maturity. Bank certificate of deposits and commercial papers of big enterprises form bulk of the fixed income instruments. So it is advisable to choose a good liquid fund and put our money rather than blocking our money in savings account. This help to those who don’t like to switch banks though their banks offer  lower interest rate.

Fixed deposits are safe means of keeping our money in Banks especially in PSU banks but money is locked for specific period. Closure of FDs before maturity invites penalty. It gives high yield as compared to SB a/c or liquid funds due to availability of our funds for long duration for banks.

C.R. Venkata Ramani

(AICWA)

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