Most of us use our savings bank account to hold cash.
While banks are great for storing and accessing cash, they have a key disadvantage. The interest rate banks provide is typically around 4%. With inflation being on average around 8-9%, your cash is actually losing its worth.
What if there was a way to get better returns, and have almost the same ease of withdrawal that banks provide?
Use mutual funds as substitute to your savings bank account
You probably think of mutual funds as ways to “invest” your savings. There is, however, a category of mutual funds that is a possible substitute for holding large balances in your savings account.
“Ultra Short-term Debt” mutual funds are like a bank account
Ultra Short-term Debt funds are designed for ease of withdrawal. For investors, an Ultra Short-term Debt fund has no exit load and no minimum holding period. Reminds you of your bank account doesn’t it?
When you need the money, you can place a withdrawal instruction online and money will be in your bank account within 1-2 working days.
Nippon India Low Duration Fund goes one step further and actually gives you a debit card which you can use across all HDFC bank ATMs when you invest in this Ultra Short-term Debt fund.
Why should you consider keeping your money in Ultra Short-term Debt funds?
You can use Ultra Short-term Debt funds to park money for short term (less than a year) needs. You get the advantage of better returns (7-8% versus 4-6%) than banks and almost the same liquidity. If the money is not used, then at least your funds get a better rate of return than in a bank.
Unlike interest earned on a savings account, there is no TDS and you pay income tax only on the return that you withdraw. The tax rate is the same as that on interest income.
Are Ultra Short-term Debt funds safe?
Yes. Ultra Short-term Debt funds invest mostly in short-term debt instruments like commercial paper, Certificates of deposit etc which means minimal interest rate risk. You should also look at the blended credit rating of the portfolio of the fund to assure yourself that the investments are safe.
Are there any disadvantages?
Most Ultra Short-term Debt funds lack the instant cash withdrawal facility most banks provide. Withdrawing on weekends might be a problem though since orders do not get processed on weekends.
You will also have to keep track of your capital gains and include it in your tax returns. (Note: Scripbox provides an easy to use statement so you don’t have to do any extra work.)
What do I do with my bank accounts?
Bank accounts score on convenience, which is probably why most people don’t look for other options. You can use bank accounts to hold your day to day funds as well as any deductibles such as EMIs which go from your account. Use Ultra Short-term Debt mutual funds to hold money you might not need in the next couple of months.