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In the recent past few years, interest rates on saving account has fallen sharply. Now, most of the bank offer less than 4% interest rate on saving accounts. Further, the minimum balance on these savings accounts also got increased. Failing in maintain the minimum balance costs huge bank charges.
Why do people park their money in Saving Account?
Nowadays having a saving account in a bank become very common. Money kept in the bank the account is risk-free.
The biggest advantage of this account is that the deposit-holders can withdraw any amount at any time. Further, the interest income up to Rs 10,000/- from the account is exempt from the income tax.
Differentiating features in savings account.
Interest on saving bank account is computed on a day-to-day basis and credited to the account quarterly.
Banks have the right to enforce the maintenance of a monthly average balance (MAB). If the deposit-holders fails to maintain that minimum balance, then banks have the right to impose a penalty.
The minimum monthly balance differs from one bank to another. In some banks, the minimum monthly balance is Rs 1,000/- while in other the minimum balance is Rs 10,000/-
Why we seek alternatives for saving account?
Interest rate in saving account is almost 3.5% but the average rate of inflation in India for the past 10 years (Year 2008-2018) has been 7.67% p.a.
This shows that you are losing the value of your money by keeping it in saving accounts.
Alternative of saving account
Liquid Mutual Fund offers the best alternative to saving account. The average return from the liquid fund in India is 7% which is much higher than the interest rate on saving account.
Liquid Mutual Fund is an open-ended fund and invest in short-term market instruments like Treasury Bills, Certificate of Deposit, Fixed Deposit etc., The logic of such fund is to have a portfolio that is high of liquidity and low of risk.
Keeping idle money in saving account take care of your emergency needs. Most financial planners suggest keeping a minimum of 6 months of expenses in saving account and invest the rest surplus amount in a liquid fund.
If you consume all your money in saving at the end of the month, then the mutual fund option is not for you. But if you can save a portion of your income every month and keep it in your saving amount, then this fund is suitable for you. These funds not only ensure liquidity but also give higher returns. If you consume all your money in saving at the end of the month, then the mutual fund option is not for you.