ALERT: It’s time to move money out of your savings bank account

Data from BankBazaar, a fintech co-branded credit card issuer, shows that interest rates, over the past year, on FDs at both private and public sector banks have gone up by 0.35-2.75 percentage points for deposits with tenure of less than 1 year, 0.75-2.50 percentage points for FDs ranging from 1-2 years, and 0.35-2.25 percentage points for 2-3 years. But, interest rates on SB accounts continue to languish at around 3% per annum. And, expectedly, banks have seen a small reduction in their CASA (Current Account and Savings Account) deposits in recent times as customers move towards the more lucrative fixed deposits. CASA deposits are a source of low-cost funds for banks.

A few private sector banks such as RBL Bank, DCB Bank, Bandhan Bank, and small finance banks such as Equitas SFB and Ujjivan SFB, though, offer rates of up to 7.25% per annum on SB accounts with balances of up to ₹25 lakh. Most of these banks, however, do not rank at par with leading banks on several metrics such as financials, a large retail deposit base, and diversified loan books.

“Saving interest rates have been in the range of 2.70–3% over the last three fiscals (2020-23), prior to which rates had seen a peak of 4% in more than two decades," says Aniket Dani, director – research, Crisil Market Intelligence and Analytics. “Bank savings interest rates are expected to remain range bound. They will not have a significant movement with changes in the repo rate," adds Dani.

Other options

From an individual investor’s perspective, an SB account offers greater liquidity (ease of withdrawal without any penalty) that a regular FD does not. But there are other alternatives to this. One, certain shorter duration debt funds such as liquid and money market funds, and two, an SB account with sweep-in facility. Both offer ease of money withdrawal and have better returns than that offered by SB accounts. You can park the surplus meant for your short-term needs here, in addition to having some money in an SB account.

Liquid and money market funds

Today, with liquid funds and money market funds offering yield to maturity, or YTM, of 6.15% to 7.39% (post-expense), returns from these funds will likely beat SB account interest rates. A year-ago, these funds were offering YTM of only 2.95% to 4.12% (post-expense). The YTM minus the expense ratio indicates the return that you can expect from a bond (or a debt fund) if you remain invested until maturity. While this may not be a precise return metric for funds where debt instruments are bought and sold (instead of being held till maturity as in a target maturity fund), it does provide some indication of what to expect.

Liquid funds and money market funds park their corpus in money market and debt instruments with a maturity of up to 91 days, and up to 1 year, respectively. Of the two, money market funds offer slightly better returns. Unlike bank interest rates though, debt fund returns are affected by interest rate movements. However, shorter the fund duration, the smaller will be this impact.

All debt funds follow a T+1 (trade plus 1 day) redemption payment cycle. For instance, if a redemption request is made before 3pm on a certain day, say Tuesday, the money will be credited to your account the very next day, on Wednesday. For redemption requests made after 3pm on Tuesday, the money will be credited by Thursday. There is no exit load on withdrawals (redemptions) from money market funds at any time. In the case of liquid funds,withdrawals within six days of making an investment entail an exit load. Beyond that, there is no such charge.

If you want the flexibility of anytime withdrawal (within a few hours) and on all days, including holidays, then a liquid fund can serve your purpose. Many mutual fund houses provide this facility in addition to the usual T+1 redemption. The catch here is that it comes with a daily limit. On any particular day, you can withdraw up to 90-95% of the money in your liquid fund or approximately ₹50,000, whichever is lower.

Sweep-in accounts

For those who prefer parking their money in banks, an SB account with sweep-in facility can be a good alternative to a plain-vanilla SB account. This entails linking your SB account and FD account for the benefit of better liquidity of an SB account along with the higher interest rate of an FD. The FDs created under this facility earn the same rate of interest as a bank’s regular FD of the same tenure. Given that sweep-in accounts appear quite similar (though they have important differences) to what are known as flexi FD accounts, be sure to read the fine print.

When you opt for a sweep-in facility, then any balance in your SB account beyond a certain threshold (minimum average balance) gets transferred into a linked FD account. This is mostly done in certain multiples. For example, every additional ₹10,000 in an SB account beyond a threshold, say ₹60,000, will be converted into an FD. On the reverse, if debits in your SB account exceed the balance available, then one or more FDs will automatically be liquidated to cover for the shortfall.

Do sweep-in accounts attract any penalty for not maintaining the minimum average balance in the SB account or for premature withdrawal from an FD? “These do not have penalties for premature withdrawal, which is what makes them attractive. However, if you frequently withdraw from the FD, you will lose out on interest. This is because the interest is calculated for the number of days the FD was with the bank." says Adhil Shetty, CEO of BankBazaar. For example, if it was a 1-year FD but you withdrew the sum within 45 days, then interest applicable will be only for 45 days. As regards the SB account, you will be charged a penalty if the balance in it dips below the minimum mandated, even after liquidating all the FDs.

Explaining how a flexi FD account works, Shetty says, “The bank may create a primary FD and a number of smaller-value FDs, and it will break each of these when the SB account balance goes below a certain threshold." But unlike with a sweep-in account, money cannot be transferred from the SB account to the flexi FD account. “You will need to instruct your bank to open new FDs associated with this account. Also, very few banks offer flexi FDs but almost all banks have sweep-in accounts," adds Shetty. According to him, the sweep-in account is an excellent option for your emergency funds where withdrawals would be fewer.