You
must have seen or read about this wonderful advertisement appearing since december
on TV as well as print media...
“SUBBU
SAB JAANTA HAIN”....
It
is an advertisement by Kotak Mahindra Bank intending to attract money in it's
savings bank account on which it recently increased the interest rates from 4% per
annum to 6% per annum. And their pitch is that do not see it a mere 2% increase
but look at it as 50% increase over & above what you were getting on your
savings bank account earlier...(a 50% increase from earlier 4% per annum to now
6% per annum)
I want you to see this advertisement
first before we proceed with this article...
I
don’t know about you but I kind of like this guy SUBBU….
What
a wonderful way to explain the concept….
Only
caveat is that SUBBU needs to take some financial literacy lessons from
Financial Planners like me so that he becomes wiser… let me explain…
Now
advertising on TV and other print media is not cheap....
A
one minute clip on TV and half page advertisement in leading biz dailies like The
Economic Times and Business Standard by Kotak Bank to advertise the simplest of
all products, the Savings Bank Account seems a bit tricky…
Somewhere,
the top management at that bank believes that 6%pa is an attractive rate of
return good enough to lure the depositors to park their idle cash with them rather then your existing bank, which in all probabilities is still giving you
a mere 4% per annum on your Savings Bank account ....
Now,
if Kotak and some other banks believe that offering a 5 or a 6 % on it's
savings bank a/c is good enough to attract depositors money, so much so that
it worth spending lacs on TV & Print media…then there might be some truth
behind it…and why not, if I am getting 2% extra, I will go there…after all, as
SUBBU says, look at it as 50% more…
Now, let
us visit the BASICS first…
What
is a “Savings bank a/c” and why do we keep money there...
Well,
you and I keep that portion of our money in the saving bank a/c that we have as
a surplus, that we have not spent but which we think we might need in a
foreseeable future...but we are not sure when we might need that money…
So
we keep our idle money in a savings bank account pending further use... Why do we
not invest this money...
Because
we might need it any time...therefore it's better to keep it idle in a savings
bank account then to invest it somewhere where it might become difficult to
withdraw it when the need arises...
So ,
as far as our savings bank money is considered, we give preference to LIQUIDITY
over RETURNS...
And
by the grace of God, the returns on Savings bank account have also become
attractive now... Alas, one good news that 2011 had to throw us...
The
Reserve Bank of India (RBI) announced a deregulation of the savings bank
deposit interest rate in its second quarter monetary policy review some time
back. This means banks are now free to determine the interest rates on their
savings accounts. Before the deregulation, banks were supposed to give a flat 4%
per annum on savings accounts.
I
expect savings accounts interest rates to go up in short term due to
competition among banks to acquire these low-cost deposits. The interest rates
are expected to be higher for deposits of more than Rs 1 lakh. But this will
hold true as long as the interest rates in the economy are high…Once RBI starts
reducing the interest rates, this golden period might also come to an end…
So
since last few months of 2011, you would have come across advertisement by some
banks highlighting the increased savings bank account interest that they would
have begun offering to their customers compared to the 4% per annum that other banks are offering...
After
the recent deregulation of savings bank account interest rates by RBI, at least
three banks have hiked their interest rates till date.
Yes
Bank was the first one to raise the interest rates on savings account with all
balances to 6%, and this was followed by Indusind and Kotak bank announcing
interest rates hikes on their savings accounts too. Others might follow too…
To start with, these are the
three/four banks that have announced a hike in their interest rates.
|
S.No.
|
Name
|
Under Rs. 1 lakh
|
Over Rs. 1 lakh
|
|
1
|
6.0%
|
6.0%
|
|
|
2
|
5.5%
|
6.0%
|
|
|
3
|
Kotak Mahindra Bank
|
5.5%
|
6.0%
|
|
4
|
5.0%
|
5.0%
|
Source:
Internet; data as on Oct 31st, 2011
Now
why are these banks offering more to it's savings bank customers and also
spending lacs of rupees advertising the same... Is it not a loose- lose
situation for them...
First
increasing their cost of fund by offering 50% more and then heavy spending on advertisement,
And
the answer is No... Because money that we keep in our savings bank account is
the cheapest source of funds for any bank... Even at 6% it is by far one of the
cheapest ...
So
they are not doing a favour to you and me by offering 2 % more but they are
actually getting a very cheap source of money from us...But there is nothing
wrong on their part either....this is how a bank is run..
And
SUBBU s right when he says that do not look at it as 2% extra but look at it as
50% more...(6% is 50% more than 4% that was earlier being offered by all banks
to its savings bank customers)
But there
is one thing that SUBBU is either not aware of or that he is hiding from us...
(in
fact, since I have developed a liking for Subbu, I would like to believe that
SUBBU is plain ignorant but he is honest)
Ever
thought where do banks park their surplus funds... banks, as per banking
regulations are not allowed to lend all their money to us… So if banks are not
allowed to lend all their money and as a rule if banks are supposed to have LIQUIDITY
at all times, where do banks PARK (as against INVEST) their surplus or idle
funds....
·
Because
like you and me, LIQUIDITY is of primary importance for a bank too...
·
And
a Bank does not have access to a savings bank type product like you and me...
·
So
a bank would like to PARK it's money in
a product where it can withdraw money at will at very short notice and yet earn
more than the 5 or 6 odd percentage that it is offering to it's savings bank
customers...
Among the 2 to 3 options available to a bank to park it's short term money,Liquid
funds offered by Mutual Funds is one…
Now,
just think for 2 minutes....
A
bank needs to fulfil 3 criteria before it can park it's short term money:
1. The
investment avenue should b safe, very safe, as a bank cannot afford to take
risks with its short term money
2. The
liquidity should be good ie; a bank can withdraw money at a day or 2 days
notice
3. The
bank should earn returns good enough to compensate for the interest rate it is
offering its customers on its savings bank or
Equivalent products...how will it make money otherwise…
So,
if banks are using Liquid funds to park their money, rest assured it fulfils
all of the above mentioned criteria of SAFETY, LIQUIDITY and attractive RETURNs
as far as short term funds are concerned...
Now,
can YOU & I invest in LIQUID funds, banks favourite products for parking
it's short term money....
The
answer is YES....
Do
we get the similar returns as to what a bank earns from liquid funds?
The
answer is YES...
Then why are we,
the lay people, not using LIQUID FUNDs
as a safe, sound instrument to PARK (and not INVEST) our short term funds and
leaving it idle in a savings bank account for months together earning a meagre
6% per annum, 5% per annum or in most cases 4% per annum? (and mind you this
was 3.50% pa earlier)…
The only
answer that comes to my mind is sheer IGNORANCE...
Either
you have not heard about this wonderful savings product or you have heard about
it but not considered the proposition seriously...
I
do not blame you for the same… Since time immemorial we have been using a
SAVINGS BANK A/C as the only and only place to keep our idle, temporary , short
term money… so what if it was earning 3.5% per annum earlier and is now earning
4 to 6% per annum…
At
least our money is safe and you might need the money any time…
After
all, we are not supposed to invest all our surpluses…we need to have spare cash
with us for emergencies or unforeseen events…
But
if banks (where we so comfortably park our excess cash) think LIQUID Funds are
safe and liquid and remunerative enough then it would be sheer ignorance on our
part not to consider this wonderful instrument that offers avenues for parking
our short-term, temporary funds…
Just
imagine, an instrument where you can park your money for short term (for a time
period as short as a couple of days), that offers liquidity so that we can
withdraw money at will (at 2 working days notice ) and yet it earns an annualized return in the range of 7 to 8% per annum...practically risk-free…(remember,
banks will not park their money where they are not safe)
Yes, well chosen liquid plus funds are currently
offering anywhere between 7 .50% to 8.00% per annum, risk-free &
YES again, you can withdraw this money on 2
working days notice…&
YES again, your money is as safe as it
was in a bank account provided you choose your fund carefully or take
professional advice…&
YES again, you can withdraw your money,
that you had parked in Liquid Funds,
either at one go or in multiple instalments,
as you please…
What
a wonderful proposition indeed…
Why
keep even small amount of money idle in a savings bank account earning a 4%, 5%
or in a few rare cases 6 % per annum return when today, we are getting upward
of 8% per annum annualised returns on LIQUID FUNDS offered by Mutual Funds...virtually
risk-free
Now
SUBBU will agree and if he is honest enough, which I believe he is, he will admit
that if a “Liquid fund” is offering 7.50% per annum to 8 % per annum currently,
and at the same time not compromising either on the SAFETY of your funds or on
LIQUIDITY, it is a very very attractive avenue for parking our idle funds that
we might need anytime…
After
all, a good LIQUID Fund is offering a COOL 25% more than the best savings bank
rate being offered by any major bank in India (7.50% of liquid fund is 25% more
than 6%, the highest interest rate being
offered by any bank on savings a/c) and a cooler 100% more than what most banks
are currently offering (8.00% of liquid fund is 100% more than 4%, the interest rate being offered by most banks on
savings a/c)
Now
have a look at the graphic below...
|
No.
|
1 year return
(% pa)* |
Expense Ratio (%)
|
Returns post
expenses (% pa) |
|
1
|
9.62%
|
0.37%
|
9.25%
|
|
2
|
9.40%
|
0.25%
|
9.15%
|
|
3
|
9.34%
|
0.35%
|
8.99%
|
|
4
|
9.14%
|
0.35%
|
8.79%
|
|
5
|
9.29%
|
0.63%
|
8.66%
|
Now,
the above table shows post expenses actual returns realised from some of the
Liquid Plus Funds over the past year….
As
you can see, the actual returns earned by some liquid plus fund over the past year
are well above 8.50% per annum…but the reason I am saying that one can expect
7.50% to 8.0% pa going forward is because RBI is expected to decrease the
interest rates going forward…but even in that scenario, it is a very attractive
proposition…
And
mind you, it's the likes of kotak, Indusind & Yes bank that are offering 5
to 6% per annum on savings account and that too now when the interest rates are
at their peak...these banks are bound to decrease the interest rates on savings
bank a couple of months later when RBI starts decreasing them…
Also,
Most of the banks have not yet increased the interest that they are offering on
Savings bank account...they continue to offer4% per annum on Savings bank
accounts…
So
SUBBU, an 8% per annum on Liquid Funds, where your very bank is parking our
money, is a COOL 100% more than 4% being offered by most banks & a cool
33.33% more than what your bank is offering us on our money…
Why
don’t you consider shifting your money from your bank a/c to Liquid Funds…
I
shall await your reply SUBBU…and shall also look forward to your next pitch…
What
did you say, you do not have access to a Financial Planners services…
Oh
dear, do not worry, I am always there for you SUBBU… call me any time in case
of any query that you might have regarding Savings & Investments or for
that matter any financial product…
No,
do not worry; my Advisory Fees are very nominal, they will be very light on
your pocket…
No SUBBU,
I will not tell anyone that you take advice from me before giving it to others…
…after all, I am your fan too…
Have a nice day SUBBU….
Thought
for the day
Don’t
SAVE what is left after spending,
SPEND
what is left after saving…
