India is known for its uncompromising savings culture. We Indians have the natural tendency to spend less and save for our future requirements. In a developing country such as ours, it is in the government’s interest to promote the habit of savings in every way possible. There are many ways for a person to save his money in a bank. Let’s compare three familiar channels of savings.
The first musketeer is the Savings Bank Account.
To many, it needs no definition for the simple reason that it is suitable for everyone who deals with money in their life. This savings bank account is opened in a bank to hold money and maintain it. There are several other functions that the account holder can explore. Some well-known functions include checkbook, debit card, overdraft, etc. One of the most inviting features of this particular type of account is its high liquidity allowing the account holder can access his money whenever he needs. He can withdraw using the ATM card or transfer a lump sum using NEFT or RTGS.
Now with digitization, you can access your savings account with an app on your phone; you can even just hold your money in a payment wallet.
The second popular musketeer of saving is dear old Bank Fixed Deposit.
Most people use this account to store the stagnant cash until the need arises for things like weddings, education, etc. The vital feature of this account is the safety of the money for a long period of time. The reward for fixing it for a specified term is the rate of interest generated, which is relatively higher than that of a savings account. This is a suitable instrument for those who want to earn returns at a minimum risk.
||The interest rate for FD
||What Rs. 10000 will grow into in 5 years
|AU Small Finance Bank
|Lakshmi Vilas Bank
But even with all that security to the money, there is the least amount of returns earned when compared to a mutual fund that gives about 12-20% in returns. With Mutual Funds, you can make the lump sum on equity, debt or hybrid schemes. With an app like MyWay Wealth you can opt to save for a purpose (education, wedding, pension, etc.)
The third musketeer is the Bank Recurring Deposit. An account opened with the intention of depositing a fixed amount of money regularly for a fixed tenure. This encourages saving as a compulsion and brings no inconvenience to the holder. It is suitable for the conservative savers who seek assured returns with just small deposits compared to a lump sum in order to meet their medium-term goals.
||Interest Rate on RD for 5 years
|State Bank of India
|Lakshmi Vilas Bank
*Rates as of October 2018
Recurring deposits are a great way to save up for future prospects, plus it instills a sense of discipline in an individual’s personal finance without much hassle. But there is a way to do this in the vicinity of your home or office and get much better returns. You can choose to invest in Mutual Funds through Systematic Investment Planning (SIP) that offer equity-linked based returns.
Who is the Third Musketeer?
Are these three the only ways to save? Or is there something better? Our third musketeer is Mutual Funds, a way to invest and save with all the benefits of these accounts mentioned above. To understand further, let us review all the similar features that the musketeers share. The most important feature is that it lacks a productive level of interest-earning potential as compared to equity-linked instruments. But people choose to opt for these due to the safety of funds. However, you can now choose to have the best of both security and high returns through Mutual Funds.
Eligibility and Return
The eligibility to hold a savings account is that he/she must be a resident of India. In the case of Fixed Deposits and Recurring Deposit is that he/she must be a resident of India and have a Savings Bank account. The accounts can be opened in any nationalized, private-sector or foreign bank in all the three cases. But if you look at Mutual Funds, all you need to do is complete the KYC (Know Your Customer). There are no safeguards against inflation for all three accounts. With Mutual Funds on the other hand, since the schemes are all linked to the market, the returns are guarded against inflation.
How are the Musketeers different?
There are several distinctions between the three musketeers too. These differences help a user to decide on which account is most suitable for him to save. The distinctions include the entry for a Fixed Deposit and Recurring Deposit, which is restricted to people above 18 years, whereas there is no age specified for opening a Savings Account or trading in Mutual Funds. The capital amount deposited in a Savings Account is not completely safe as compared to deposits in Fixed and Recurring accounts. Savings accounts have high liquidity as opposed to fixed deposits and recurring deposits that have a lock-in but allows withdrawals on the payment of a penalty.
The minimum balance in a savings account depends on the type of account; in a fixed deposit, it is Rs. 1000 and has no maximum limit. Any deposit above 15 lakhs qualifies for a special interest rate. The minimum balance in a recurring account is Rs. 100. The tenure for a savings account is not fixed and can be used as long as it is active. The term deposits are currently offered up to 10 years. The recurring deposits are offered from 6 months to 10 years.
The interest rate is based on the daily balance in the account. The variable interest rate is applicable to the balance above 1 lakh and fixed rate is compounded half yearly up to 1 lakh with a minimum of 3.5% at the moment. The interest rate of the term deposit and recurring deposit depends on the tenure. It currently goes from 5.75% to 6.5% for term deposit and 6.35% to 6.5% for recurring deposit. Senior citizens qualify for special interest rates, which is usually 6.25-8.00%
The interest earned in a savings account is exempted from tax up to Rs. 10000 under Section 80TTA since 2012-2013. Any interest above this limit is taxed accordingly under ‘income from other sources’, however, there is no Tax Deducted at Source (TDS). The interest earned in a fixed deposit and recurring deposit, above Rs 10000 is taxable at the rate of 10% through TDS. This limit has been pushed up to Rs. 50000 for senior citizens. In the case of fixed deposits, the tax is imposed on the amount when it is deemed to be received, whereas for a recurring deposit the tax is imposed on interest received on maturity.
In recent times we have grown to accustom a saving habit no matter what profile we fit into. Be it a minor or adult, businessman or house maker, student or teacher, grandfather or daughter; everyone is encouraged by the government and society to be ready for future possibilities by saving up in different ways. These three accounts are the most popular and it allows the holders to gain a certain amount of returns. But it is not enough. In my opinion, these three instruments are great for “storing” instead of “saving”.
The truly best way to build wealth in long term is to invest in Mutual Funds that give to the safety of your money along with higher returns of the above three instruments. With digitization flooding this industry you can now invest using your phone through the MyWay Wealth App. You get all the perks of the three instruments and a whole lot more:
- Mutual funds earn a high amount of returns.
- Investment options include lump sum and SIP.
- There is easy accessibility of the amount.
- The risk involved is diversified.
- There is protection against inflation.
- Process for the purchase of Mutual Funds is easy.
- Tax benefits of up to Rs. 1.5 lakh per year (under Section 80C), by investing in ELSS Mutual Funds
- Easy tracking of investment and regular alerts with the MyWay Wealth app.
- Save for a goal with the MyWay Wealth app (education, wedding, retirement, etc)