The Economic Times
English EditionEnglish Editionहिन्दीગુજરાતી
| E-Paper
Search
+

    Is it time to move money from savings accounts to debt mutual funds?

    Synopsis

    Bank saving deposit rates are coming down and this definitely gives debt mutual funds an edge over the savings bank account in terms of post-tax returns. However, the comparison is not that easy.

    Shutterstock.com
    Financial planner: Santosh Joseph, Founder, Germinate Wealth Solutions, a financial planning firm, based in Bangaluru.

    Questions asked by his clients:
    1. Since banks are cutting interest rate, should we move our savings to liquid or overnight funds?
    2. Should we use liquid funds as an emergency account since it has instant redemption.
    3. Are Debt funds safe for our FD proceeds?
    Things You should consider
    • Annualized Return
      for : %
    • Suggested Investment
      Horizon:
    • Time taken to double
      money: N.A
    Things You should consider
    • Annualized Return
      for 3 year: 1.65%
    • Suggested Investment
      Horizon: >3 years
    • Time taken to double
      money: 9.5 Years

    His response to clients:
    Bank saving deposit rates are coming down and this definitely gives debt mutual funds an edge over the savings bank account in terms of post-tax returns. However, the comparison is not that easy. The call gets tougher when you are in the middle of a pandemic with serious threat to your salary and job. On the other, all investment products, debt mutual funds included, are facing numerous challenges. So, here is what I advise: do not take a one-dimensional approach to your investment and savings. To put it clearly, you can not replace saving deposits with a liquid or an overnight fund. These two categories are the closest to the safe bank deposits and even sweep-in FDs.

    Liquid funds are used as emergency fund by many investors but in the current time, you need a lot of money for emergencies. As rightly said, cash is king. We all should gravitate towards safety at the moment. Even though liquid funds have always honoured redemptions and all there is instant redemption, you have to think about paying online if you can't go out. You should have money in your bank account for all the emergencies that you face on a daily basis. Most of the young investors who want to earn extra and want to use a debt fund, should be very cautious. If you are 26 and don't have a big corpus, don't be adventurous. 30-40% of your 'saving' should be in your bank account. Rest of it, you can choose to put in a debt fund which matches your investment goal, strategy and horizon.

    Coming to FD proceeds. If you look at what happened in debt funds recently, the questions have been raised on short-term products that guaranteed you safer returns in the short term. However, long term funds have been untouched. If you have a slightly longer horizon and want to earn better returns, choose a medium to long-term product and invest. Remember, debt mutual funds shouldn't be your first redemption in times of need. The money that you need to grow over some time should be in the funds. No matter if the savings account is giving 3%, it is a better place to keep your emergency cash.

    Also Read

    6 Comments on this Story

    A K13 days ago
    The comparison between FD and debt funds are always debatable. One has to take his own take according to his risk-taking capacity. Whenever mutual fund default happens people start saying against them and the same happens in banks also.
    isha gupta14 days ago
    banks will become zero.. npa are increasing very fast.. govt does not want to punish senior fraud bankers..or the fraud npa corporates.. banks are going down the drain.. protect your money.. invest in bonds or debt mf
    Arun Kumbhar14 days ago
    LIC Jeevan Shanti is best option to lock the Return for even 70 years.. it locks higher return if taken with deferred pension.. that is wonderful..
    There is 100% capital for any amount. protection by 3 ways.
    First LIC as fincially strong trusted brand with very objective of safety and long term return..
    Second LIC has regulatory control of IRDA.
    Third LIC has soverign guarantee of Govt of India as last resort.
    The insecurity of debt fund is proved by recent Franklin Templelton Debt fund story.. no one is serious about investors and daily new devlopments are going against investors.. The same MF house which was promising all trust yesterday, today it is putting all might to defeat investors in court.. A matter of 23000 Crores is not a big issue for an international group worth 50 lakh Crores.. Just 0.50% of net value..
    Even the SEBI or any other regulator seems unconcerned about common investors...
    As far as banking sector is concerned just 5 lakh cover only if banks gives is not enough.. the insurance claim may also take several years for investors to claim money..
    So best option is Jeevan Shanti...Truly best in all Respect...
    The Economic Times