Savings Accounts Only Benefit Your Bank, NOT You: Try These Options Instead If You Need Liquidity

Summary

The video discusses alternatives to low savings account interest rates, such as HDFC and Access Bank offering just 2.75% and SBI offering 2.7%. It covers options like fixed deposits (FDs), moving to a higher interest rate bank, sweep-in FDs, liquid funds, arbitrage funds, and dynamic asset allocation funds (DAAFs). The video highlights the benefits of mutual funds, especially in terms of tax advantages, and compares them to traditional FDs. It also explains the tax implications and liquidity benefits of various investment options, aiming to help viewers maximize their returns while managing risks.

Takeaways

• 😀 HDFC Bank, Access Bank, and SBI have significantly reduced their savings account interest rates to 2.75% and 2.7%, respectively.
• 💰 Fixed Deposits (FDs) offer better returns (3.5% to 8%) but come with a lock-in period and penalties for early withdrawal.
• 🏦 Moving to a different bank with higher savings account interest rates, like IDFC First Bank (up to 7.35%), can be an option, though it comes with terms and conditions.
• 💡 Sweeping FDs are linked to your savings account, providing flexibility. However, early redemption will result in lower interest rates based on the duration the money was invested.
• 📈 Liquid Funds are a low-risk mutual fund option that offers returns similar to FDs with flexibility, allowing redemption within one day.
• 📉 Arbitrage Funds also offer similar returns (5-6%) to liquid funds but have the added benefit of being taxed like equity, with lower capital gains taxes.
• 💼 Dynamic Asset Allocation Funds (DAAFs) provide higher returns than liquid and arbitrage funds and have a favorable tax structure after two years.
• 📊 Debt Plus Arbitrage Funds combine 65% debt and 35% arbitrage, offering a balanced investment option with long-term tax advantages.
• 💸 Mutual funds offer the advantage of being taxed on capital gains, meaning only the income component of withdrawals is subject to tax, not the principal.
• ⚖️ Mutual funds allow for the carry-forward of losses, enabling tax adjustments if you have other investment losses elsewhere.

Q & A

What is the current interest rate offered by HDFC Bank and Access Bank on their savings accounts?

HDFC Bank and Access Bank have reduced the interest rate on their savings accounts to just 2.75%.

How does the SBI savings account interest rate compare to other banks?

SBI offers a savings account interest rate of 2.7%, which is slightly lower than the rates offered by HDFC Bank and Access Bank, both at 2.75%.

What is one alternative to low-interest savings accounts mentioned in the video?

One alternative mentioned is a bank Fixed Deposit (FD), which can offer interest rates ranging from 3.5% to 8%, depending on the bank.

What happens if you redeem a Fixed Deposit (FD) prematurely?

If you redeem an FD prematurely, you will incur a 1% penalty and receive a lower interest rate.

What is the interest rate structure for IDFC First Bank’s savings account?

IDFC First offers a slab-wise interest rate for savings accounts: 3% for balances between 0 to 5 lakh, 5% for 5 to 10 lakh, and 7.35% for amounts exceeding 10 lakh.

What is a Sweep-in FD and how does it work?

A Sweep-in FD is linked to your savings account, where money flows from the FD to the savings account when you write a check or make a payment. There is no penalty for prematurely breaking the FD, but the interest rate depends on the duration the money remains in the FD.

How do liquid funds compare to sweep-in FDs in terms of interest rates and flexibility?

Liquid funds generally offer a similar yield to sweep-in FDs (around 6%), but with the added benefit of flexibility. If you redeem early, you still earn the yield based on the investment period, unlike sweep-in FDs where early withdrawals may lead to a reduced rate.

What tax advantage do arbitrage funds offer over liquid funds?

Arbitrage funds are taxed as equity funds, meaning they are subject to a 20% short-term capital gains tax for holdings under one year and 12.5% for holdings beyond one year. This tax advantage is not available with liquid funds.

What is the advantage of Dynamic Asset Allocation Funds (DAAFs) compared to other mutual funds?

DAAFs typically offer higher yields than liquid or arbitrage funds because they invest in debt of slightly longer maturity. Additionally, they benefit from long-term capital gains tax treatment after two years, which can be more favorable than other mutual fund categories.

What tax benefits do debt funds offer compared to bank FDs?

Debt funds are taxed under capital gains tax, where only the income portion of the withdrawal is taxed, not the entire amount. This allows for tax efficiency, unlike bank FDs where the entire interest is taxed annually.