Don't let idle cash sit in a savings account: Here's what you should do instead

One should use his savings account to park only temporary surpluses or to use the account for routing investments and meeting expenditures

Got an appraisal this year? You should not let this additional amount just lie in your savings account earning meagre interest, which is also taxable. 

 Leaving a specific amount idle in your savings bank account for a long time, while may earn you some interest, also makes you miss the chance of generating higher returns if invested elsewhere. Apart from the obvious fact that savings account returns are lower than those from fixed deposits (FDs),  liquid funds or ultra short-term debt funds, there is also the psychological angle of 'out of sight, out of mind' when it comes to not spending your savings balance on non-essentials just because its visible.

" By leaving money in your savings account  goal-based funds that are redeemed for portfolio rebalancing purposes sometimes get splurged and never make their way back into the portfolio! Therefore, it's a vital element of prudent personal budgeting to put away the cash that you won't be needing access to in the immediate future into a liquid fund or a sweep FD that could be part of your emergency fund," said Aniruddha Bose, Chief Business Officer, FinEdge.

 

A savings account will typically pay you interest at the rate of 3-4 per cent per annum. For example Rs 1,000 saved for a year at 4 per cent will give you 40 as interest, which is a very low return. The math shows why you move surplus liquidity into savings and investment instruments that can provide better returns. 

"While most banks usually offer 3-4% p.a. on their savings account balances, some private sector banks and small finance banks offer higher interest rates depending on the balances maintained in the savings account. However, the post-tax returns from one’s savings account, after factoring in the tax deduction available under Section 80TTA and Section 80TTB, would still be lower than the returns generated by various investment instruments. This is why one should use his savings account to park his temporary surpluses or to use the account for routing investments and meeting expenditures. Any investible surpluses should be invested in various investment instruments depending on one’s investment horizon, asset allocation strategy and risk appetite," said  Sahil Arora, Business Head, Unsecured Loans, Paisabazaar.

Here are some options you could consider

Opt for a sweep-in facility

"A no-frills savings account in most top banks fetches close to 2.70-3% per annum interest. Therefore, investors naturally look for ways to optimize their returns on unutilized funds. Utilizing cash in a savings account depends on investors' overall portfolio, the nature of the occupation, financial goals and many other factors. Opting for a sweep-in FD is the best way for someone without an adequate emergency fund," said Ajinkya Kulkarni, Co-Founder and CEO, Wint Wealth.

A Sweep In or auto sweep facility is a balance that's in excess of the stipulated amount which is transferred into a fixed deposit for a tenure of 1 year. The amount transferred will earn you a higher rate of return. The sweep facility is a kind of fixed deposit, and it is linked to your savings account or current account depending on which account you hold with the bank. If the bank has the sweep facility, under your instructions you can specify the amount you want to sweep into a fixed deposit and link it to either the savings or current account. The other benefit of a sweep facility you can make withdrawal from such fixed deposits for any emergencies, without affecting your savings or even breaking the deposit amount, or even worrying about the interest since it will still continue to earn interest on the full fixed deposit amount.

"Some banks offer you the facility to open a savings bank account and link the same to your fixed deposit, while some offer you the facility based on the overdrafts taken by you. In the latter process, is a better option since this gives you access to have an account like savings or current accounts that will not require you to have a minimum balance," explained Bankbazaar.

The sweep in facility would automatically move extra cash over and above a predefined limit to a linked fixed deposit that fetches a higher interest rate.

"For example, if a salaried person has Rs 1 lakh in a savings account and the monthly operating expense is Rs 50,000, the person can use a sweep-in FD that gives 6-7% per annum interest with minimum risk. Whenever this individual has more than  Rs 50,000 in this savings account, it automatically moves to the sweep-in account. The interest income on savings account and sweep-in FD are taxed at marginal slab rate," said Kulkarni.

You could also opt for a liquid mutual fund

Liquid Funds invest predominantly in highly liquid money market instruments and debt securities of very short tenure and hence provide high liquidity. They invest in very short-term instruments such as Treasury Bills (T-bills), Commercial Paper (CP), Certificates Of Deposit (CD) and Collateralized Lending & Borrowing Obligations (CBLO) that have residual maturities of up to 91 days to generate optimal returns while maintaining safety and high liquidity. Redemption requests in these Liquid funds are processed within one working (T+1) day.

A liquid fund makes sense for retail customers who prefer to keep their surplus cash in Savings Bank deposits as they consider the same to be safest and they could withdraw the money at any time.  

Liquid funds are preferred by investors to park their money for short periods of time typically 1 day to 3 months. Wealth managers suggest liquid funds as an ideal parking ground when you have a sudden influx of cash, which could be a huge bonus, sale of real estate and so on and you are undecided about where to deploy that money. Many equity investors use liquid funds to stagger their investments into equity mutual funds using the Systematic Transfer Plan (STP), as they believe this method could yield higher returns.

Point to note: Surplus cash invested in money market mutual funds earns higher post-tax returns with a reasonable degree of safety of the principal invested and liquidity.

"If the investor plans to use the excess cash in the savings account for expense or investment in the next few months, it is better to move it to a liquid mutual fund which offers returns at par with a short-term FD, without any premature withdrawal penalty. If an investor with Rs 50,000 monthly operating expense and Rs 1.5 lakh in the savings account plans to allocate the excess cash to equity mutual funds staggered, the best way is to move Rs 1 lakh to a liquid mutual fund. The investor can set up a monthly STP (systematic transfer plan) from the liquid fund to a desired equity fund. This approach optimizes the returns on idle cash until deployed for the desired use. The returns from liquid mutual funds are taxed at slab rate, without the benefit of indexation," said Kulkarni.

Short-term investors can opt for an FD 

it is advisable to park the bulk of your savings with large, stable banks and go for a carefully calibrated exposure when it comes to smaller banks. If a small bank happens to go belly-up, your deposits up to 5 Lakh can be claimed through deposit insurance. You might not be able to recover the rest.
 

"For short term investment, you may consider FD. Its term may range from seven days to a decade. It is a savings tool offering moderately higher returns than a savings account, FDs are loved for assured returns and capital safety. A recurring deposit requires you to make a fixed monthly contribution for six months to 10 years. When created at the same bank, FDs and RDS offer the same returns. While an RD is ideal for creating your emergency fund, an FD is ideal for holding it. During an urgent need, you can liquidate either. You will only lose a portion of your interest for the premature liquidation," said Shetty. 
 

You can opt for tax saving-FD with five-year lock-ins that helps you save income tax under Section 80C of the Income Tax Act. Senior citizens also earn 25-50 basis points higher interest than regular FDs. FDs and RDs are good for capital safety and moderate returns. But they are not recommended for long-term investment. 

There is always ELSS 

One of the best options to save tax is Equity-Linked Savings Scheme (ELSS). This is a type of mutual fund specifically designed to provide tax benefits under Section 80C of the Income Tax Act. As equities beat other asset classes by a wide margin over the long term, investors should prefer equities or equity mutual funds (preferably through SIPs) for investment horizons of 5 years and above.    

"ELSS funds primarily invest in equity and equity-related instruments, and they have a lock-in period of three years. The investments made in ELSS funds are eligible for a tax deduction of up to Rs. 1.5 lakhs under Section 80C, which can help reduce the investor’s taxable income," said Adhil Shetty, CEO of BankBazaar.

Arbitrage funds for high earners

Arbitrage funds work on the mispricing of equity shares in the spot and futures market. Mostly, it takes advantage of the price differences between current and future securities to generate maximum returns. The fund manager simultaneously buys shares in the cash market and sells it in futures or derivatives markets. The difference in the cost price and the selling price is the return you earn.  

“If investor is in high tax bracket, they can invest their surplus fund in arbitrage funds. These funds are taxed like equity where it is only 15% tax if redeemed within 1 year and 10% tax if redeemed after one year.

Arbitrage funds are very low risk, give better returns than most savings account and you also get effective lower tax rate on them," said  Akshar Shah , founder, Fixed Invest .

Risk-free investors can opt for government schemes 

fixed returns and risk-free investment, you can choose govt schemes such as PPF that gives you fixed returns in the long-term. You can park maximum of Rs 1.5 lakh in this scheme and claim all deposits as deductions under Section 80C.