Try Debt funds instead of Savings Account

Everyone thinks of investing, but few consider optimising their investments by utilising the various options at their disposal. In this note, we explore the opportunity that investors always had staring them in the face, but rarely considered.

For too many investors, saving money means putting their hard-earned income in a savings bank account. All investments are then routed through this savings account. Nothing wrong with that, you may feel. We agree that this is 'standard practice' so investors can't be faulted for showing no inclination of deviating from it.

But when you consider the pittance investors make on their savings account (currently 3.50% per annum), it is surprising that this 'standard practice' still finds wide acceptance. You say, investors do not have any option because they can hardly be expected to hike the savings account rate from 3.50%? We say there is a far more rewarding option that is staring investors in the face.

We did an analysis comparing investments made from a savings bank account with that made from a debt fund. The results are there for all to see. For this we have made some assumptions:

1. There are two investment scenarios. In the first one, the client starts a monthly systematic investment plan (SIP) of Rs 50,000 over 12 months in a diversified equity fund, i.e. total investment of Rs 600,000 over a year from his savings bank account.
   In the second one, the client first invests lump sum in a short-term debt fund (alternatively, this can be a liquid fund) and then does a systematic transfer plan (STP) in the same diversified equity fund for the same amount and tenure.

2. In the savings account and the short-term debt fund, he has exactly Rs 600,000 at the beginning of the first month. He neither withdraws any money nor does he add to it. At the end of the 12th month, he is left only with the interest/capital appreciation in his bank account/debt fund.

3. The savings account draws an interest of 3.50% p.a. (this is a fact, not an assumption). The debt fund generates a return of 4.75% over 12 months; this is a conservative assumption, liquid funds and short-term plans are known to deliver higher growth.

4. The client falls in the highest income tax bracket, i.e. 33.66%.

5. Investment tenure in the debt fund is more than a year.

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