Recently, theannounced a floating rate of interest for its savings bank deposits above Rs 1 lakh. This means, the interest which customers were receiving on their will change based on the current repo rate in the economy.
The rate is going to be pegged at 2.75% below repo rate; at the current repo rate of 6.25%, it means SBI’s savings bank rate for balances above Rs 1 lakh is 3.5% per annum. But what happens if the repo rate falls below this? According to this arrangement, the savings bank rate will fall too and vice versa. Given SBI’s move, there is also a chance that other banks may follow suit.
This kind of fluctuation in a savings deposit rate would be a new experience for savers. Those who have high savings balance may even be tempted to switch to, with the hope of higher and stable returns. If you too have that with more than a lakh sitting idle and are considering the move to , here is an alternative plan for you.
Instead of the traditional FD, why not consider liquid funds and short-term income funds? Liquid funds invest in debt securities with low maturity of 30-60 days. You can buy these funds at anytime and redeem at a days’ notice with returns accumulated for the period that you remain invested. At present the expected return from this type of fund is around 7-7.2% per annum.
Liquid fund returns too are likely to move lower if the repo rate falls, but the flexibility and the ability to deliver relatively higher return in low interest rate periods gives these funds an edge over fixed deposits.
Ideally liquid funds can be used for parking money that you don’t need for say 3-6 months. Staying invested in debt funds for more than 3 years gives you the tax advantage of indexation which can lower your tax outlay compared to say a.
What you need to watch out for is the quality of theand the experience of the . Consistency of performance goes a longer way than ability to deliver the highest return in the category. Even debt funds carry market risk, a high return comes with high risk which you may want to avoid for money kept in liquid and short-term funds. Hence, track record is key when it comes to picking these funds.