Why settle for 6% on your savings account when short-term FDs can give 8-8.5%?

Bank | admin | December 1, 2011 at 9:16 am

If you think a 6% interest on a savings account is a big deal, imagine a return of 7-8%, even 8.5%. That is what banks are offering right now on short-term fixed deposits of up to 15-30 days (see table). These are no small, obscure banks trying to lure low-cost deposits. The country's largest commercial bank, the SBI, is also in the fray.

"Today, you can get 7% interest on a 7-day deposit. So, I don't think the saving bank interest rate is a very important deciding factor for the customer," said SBI chairman Pratip Chaudhuri while talking to ET Now earlier this month. What's more, you can break the deposit anytime you want, so there is no compromise on the liquidity front. The only penalty is a 1 percentage point lower rate of interest. This still works out to 6-7.5%, far better than the 5.5% offered by some banks on deposits of up to Rs1 lakh.

However, for a customer to gain from the high interest rates being offered, it is imperative that these short-term deposits be started online. If these require a visit to the bank, filling up of forms and KYC procedures, the entire purpose is defeated. Also, breaking the deposit should be automatic and should not require any paperwork by the investor. So, if your bank offers Net banking facilities and is providing attractive rates on short-term deposits, start one today.

This could be especially useful if you have a lot of cash that needs to be deployed for the short term. For

instance, if you have sold a house recently and are waiting to invest this money, you can take advantage of such schemes. The entry barrier is very low, with the minimum investment in the SBI being as little as Rs1,000. In Uco Bank, it is Rs100.

For customers looking to park bigger sums in short-term avenues, liquid funds can also be a good option. The best liquid funds have given annualised returns of over 9% in the past month. You don't sacrifice liquidity when you invest in these funds. The money is in your account within a day of redeeming the investment.

Besides, there is no exit load on the funds. Here again, a lot will depend on how the investor buys these liquid funds. If they are bought online, it is fairly simple, but if it requires a visit to the broker or mutual fund office, and filling up of forms, the usefulness of these short-term avenues diminishes.

Source: Economic Times