A savings account is a bank account. Many individuals have opened a savings account in various banks. These accounts are secure and reliable. These are good short-term savings options for individuals. People deposit funds in savings account to safeguard their excess funds, which they do not intend to invest. It permits multiple withdrawals every month. They have a cheque facility, and debit cards can also be linked to this account. These funds generate modest interest in every period. But the interest generated is less in comparison to various other deposit options. A savings account may seem to have many benefits, but it will have some shortcomings. It may never be able to satisfy the financial requirements of its account holders. As one may wonder, why do we need alternatives to a savings account, here I have compiled some options better than investing in a savings account.
Through this article, I will enlighten the readers about the shortcomings of a savings account. Along with this, I shall also put forth some better avenues worth your attention. What are the benefits of opening a savings account? Why should an investor look for alternatives to a savings account? What are the best alternative to a savings account? How advantageous are they? These are some of the questions that will be answered in this article.
The motive behind seeking alternatives for the Savings Account
The average rate of inflation is falling for the past few years. This is a matter of concern for investors who have parked their funds in bank deposits. It is most likely that the interest earned on these accounts will fall in the future. The interest rate offered on savings account today ranges from 3% to 5%. For fixed deposits, the interest reaches a maximum of 9%. Therefore, a savings account does not pay as much as other financial instruments. The net of inflation returns is negligible on the savings account. It is almost zero for fixed deposits. Thus, the alternatives to a savings account are the need for an hour.
Best Alternatives To A Savings Account
Mutual funds are the perfect alternatives to savings accounts. They offer a high-interest rate, which is influenced by the market conditions. Investment in mutual funds generates more returns than a savings account. Let us dive into the details of different types of alternatives.
1. Money Market Accounts
A money market account is similar to a savings account. But some distinguishing factors make investing in this account more worthy. The conditions in the money market determine the interest rate on a money market account. The key feature to be highlighted here is that the interest rate is higher than a savings account. Provided the account satisfies the criteria of hosting a minimum amount and limited withdrawals every month. The cheque facility associated with this account is also available to the account holders.
The only constraint, in this case, is the limited number of cheques. It implies that the account holder can write a relatively low number of cheques on the account per month. There are other limitations, as well. These are the minimum opening deposit amount and the maintenance of minimum balance in the money market account. Some financial institutions may charge a penalty fee, or others may reduce the account’s interest rate. Make sure that you are aware of the details of this account if you are planning to invest.
2. Certificates of Deposit (CDs)
The certificate of deposit is similar to bank fixed deposits. But the interest earned on these deposits is more than fixed deposits. The tenure of these deposits is fixed, just like fixed deposits. This means that the funds in these deposits are inaccessible to the investor for the entire tenure. This investment is most suitable for investors who can do without their savings for a long duration.
The longer the lock-in period, the higher the interest earned. Premature withdrawal is not permitted. If the money in this account is touched before the tenure, then it will be accompanied by penalties. CDs offer more flexibility when it comes to the utilization of the surplus funds of the investors. Investment with only large denominations is accepted in these funds.
3. Liquid Funds
Liquid funds are low-risk investment options. This investment scheme is open-ended, and it had short-term maturity. They have the facility for capital protection under the constrain that the liquid funds are well -maintained. These funds generate interest of 7% to 8% per annum, and the investors can claim their deposits within a day. The money from these funds can easily be accessed by investors. By making withdrawals, the interest earned is still equal to that earned through fixed deposits.
4. Ultra-Short Term Funds
These are funds with a tenure of less than a year. They pose a very low-risk lesser than the liquid funds. But they generate better returns than a savings account. The investors have the provision to park their funds for a few weeks to months together. They are the perfect alternatives to a savings account as they do not have a lock-in period. The withdrawals can be make provided sufficient balance is maintained in these funds.
5. Government Bonds
Government bonds are the safest means of investment. If the investors are looking for viable options to invest their surplus funds, nothing is better than government bonds. This is an RBI (Reserve Bank of India) initiative. The investors can successfully buy these bonds through auctions. They are issued through non-competitive bidding facilities. Investors can either use the mutual fund route to purchase these bonds or buy directly from the government.
6. Banking And Public Sector Unit (PSU) Debt Mutual Fund
These are long-term investments. The lock-in period for debt mutual funds is not less than 3 years. Banking and PSU funds are mutual funds. A major portion of their corpus is invested in bonds, certificates of deposits, and debentures. They have high liquidity, low risk, and provider better returns to the investors. The government is actively associated with these funds which guarantee repayment of the funds.
7. Fixed Deposits
A fixed deposit is a type of investment in which the funds are locked- in for a duration of time. Different types of fixed deposits serve various purposes. They usually have a tenure of a few days to years together. These deposits earn interest at the rate of around 7% to 9%. Investors cannot break these deposits before their maturity. Otherwise, it will be liable for a penalty. These deposits are completely risk-free. As they are not dependent on the market conditions. Overall, they are a good alternative to a savings account as the returns are better and guaranteed.
8. Checking Accounts
The interest rate offered by this account also fares better than the savings account. The annual percentage yield goes up to 2.00% in comparison to some of the low interest in generating savings account. A high rate of interest on this account is achievable upon fulfilling certain criteria. This included a minimum balance, direct deposit, and a permissible number of transactions. The failure to meet any of these requirements results in lower returns. There is no penalty fee charged in this case.
9. Lending Services Among Associates
Such services are available online through websites. This is an efficient method for individuals looking forward to borrowing money from sources other than the banks. The lenders can gain huge benefits from lending their funds. They can earn excellent returns on such investments. Through this method, the lenders provide loan capital to the individuals in need of money. But the major drawback of these services is there is no guarantee of the funds. There are possibilities that individuals may lose money from both lendings as well as the borrowing side.
Keeping these aside, the borrowers registered under these services are scrutinized. They should meet the minimum requirements before borrowing the lump sum from the lenders. This feature has indulged more investors to explore such peer-to-peer services. Sometimes the investors may receive returns as high as 6.00% or more. With time a large majority of the investors are truly overwhelmed with these services.
The risk involved in this type of lending is reduced by optimizing the structure of lending. When the borrows request money, the loan amount is not lent only by a single lender. Instead, the loan amount is split between various individual lenders that minimize the risk of losing money. In this manner, if any borrows wish to borrow a sum of Rs.1 lakh then the amount will be provided by a contribution of Rs.2,000 from 50 lenders.
The borrowers are evaluated to avail of the loan, the credit risk, and the desired interest rate. On the other hand, the lenders are classified based on the level of risk to regulate the types of loans that they can fund.
10. Cash Management Accounts
These are new products in the financial market that are issued only by non-central financial companies. They are a hybrid product composed of features similar to a savings account and checking account. These services are available online so that the investors can access the services remotely. If the brokerage facilities are already prominent in the same firm then, investors have the benefits of merging all the accounts under one. They are a good alternative to a savings account as the interest earned provides higher yield. The funds from this account are moved only in limited ways. Electronic transfer is a route that permits the moving in and out of funds.
11. Online Bank Savings Account
These accounts are similar to a savings account, but these services are shifted online, which provides remote access to customers. There is no face-to-face interaction available under the amenities offered to the customers. Everything is done virtually. Therefore, customers need to be well-versed with technology and electronic devices like mobile or PC. These are high-yielding accounts but, the interest rates are bound to fluctuate.
How Are The Alternatives To A Saving Account Fruitful?
These alternatives can be highly beneficial in terms of liquidity and tax treatment. Let us look into these properties.
There is no doubt that the money kept in the savings account is liquid. But the liquidity offered by other funds is also makes investing and withdrawal a piece of cake. The investment process for all these alternatives is like any other mutual fund. The redemption procedure is also simple. The amount gets credited to the investor’s account with minutes of its sale. Apart from this, investors can also avail of the debit card facility.
2. Tax Treatment
The interest income is the interest generated from the bank deposits. Whereas the interest earned from mutual funds is called capital gains. The interest income is directly summed to the salary income of the investor. But this is not the case with capital income. There is a tax payment associated with capital income.
i. Interest Income
When the investor is filing the income tax returns he should declare the interest income. The section ‘Income from other sources’ should be filled. While declaring the interest income, the applicants can also avail of tax exemptions. This exemption is a maximum of Rs.10,000 as prescribed by section 80TTA for non-senior citizens. For senior citizens, it is Rs.50,000 as prescribed by the newly introduced section 80TTB. However, banks do not reduce the TDS on the interest earned from the funds in the savings account.
ii. Capital Gain
Mutual funds like liquid funds, ultra-short-term funds have a tenure of more than 3 years. Hence Long-Term Capital Gain Tax (LTCG) will be charged.
Let us summarize the alternatives for a savings account. Based on interest, whether the funds have to be locked-in, and the risk posed by the returns.
Every individual has different financial needs. Some may need money to fulfill short-term needs. Others may be saving money to meet their long-term requirements. Everyone likes to park their funds in a savings account. But is it bearing any fruit to the investor in the long run? Investing in a savings account is only beneficial for short-term needs. This is true, as it generates a modest interest on the deposit. But a major portion of these funds remains idle in the long run. Thus, investors must opt for better avenues to maximize their wealth.
What are the benefits of parking funds in the savings account?
Several features make investing in a savings account worth it. But the primary goals satisfied by these deposits are security and liquidity. A savings account is the safe keeper of an investor’s funds. The money parked in this account can be withdrawn as and when needed. The different modes of withdrawal are.
- ATM for instant cash.
- Debit cards for online payments and cash withdrawals.
- Internet banking for online payments.
- The cheque for making offline withdrawals and payments.
- UPI is also a form of online payment.
By linking the savings account with any of these modes of payment transactions are feasible. Bank to bank transfers is instantaneous. Online payment is instant. The purchase of goods and services has become simpler by making online payments. The money from the savings account is not physically present with the individuals. Instead, it is present within the bank boundaries. But they offer sufficient liquidity, which makes it equal to having money in hand.
The savings account offers interest on the deposits. This leads to substantial growth in the funds. An individual can open multiple accounts to satisfy different financial goals. The money present in this account can also serve during a financial crisis. Instead of opting for breaking a fixed deposit, the money from these reserves can be handy. These funds are safe because they are covered under the deposit insurance till Rs.1,00,000. Now that we know the benefits of parking our funds in a savings account so what are the alternatives for?
We have already seen some of these tools which can be used to make our money work for us. Some schemes offer high returns that lead to the growth of the investor’s money plant. Some of the alternatives offer facilities like debit cards, net banking, cheques, and so on. This makes the investors feel as if they never stopped investing in a savings account. Alternatives to a savings account are the need of an hour. Some of the best ones would be liquid funds and ultra-short-term funds. The liquidity, flexibility, risks, tenure, and the returns born by these alternatives are quite decent. This will surely prove to be a good move to your financial route.