Investors must not keep large amounts of money idle in savings bank accounts given that banks are yet to raise savings account rates despite the Reserve Bank of India increasing repo rates by 250 basis points since May 2022, they advise.
State Bank of India offers 2.7% for money parked in savings bank accounts, while ICICI Bank and HDFC Bank offer 3%.
“The differential between savings bank and liquid fund returns has increased to 300 basis points,” said Shankar S, a certified financial planner at Credo Capital.
While a savings bank account may give the investor instant liquidity, financial planners say investors miss the opportunity of earning extra returns by parking large amounts there.
“Investors should have a corpus of six months’ expenses as emergency funds. While earlier this could be parked in a bank savings account, given the high rates offered by liquid funds, one could move half of it there now,” said Money Mantra founder Viral Bhatt.
Liquid funds are considered to have high safety by financial planners as they invest only in Treasury bills, commercial paper and money market securities with maturity of only up to 91 days, and are least affected by movements in interest rates. Once a redemption request is placed, investors can get back money the next working day.However, some financial planners point out that liquid fund returns are variable and retail investors may not be very comfortable parking emergency money there just to earn a few rupees more. There are also tax implications.
