How Savings Bank Interest-rate deregulation affects Liquid Funds

How Savings Bank Interest-rate deregulation affects Liquid Funds The charm of liquid funds offered by mutual funds are going to become unattractive, as a result of recent deregulation of savings bank interest rate. Normally Corporate and High-Net worth Individual (HNIs) invest their surplus funds that was lying idle in the current account in short term liquid funds of mutual funds to earn a reasonable return when compared to Savings Bank Accounts. Bank are now offering upto 6% annual interest on savings bank accounts, this 6% assured return is more than what liquid fund would deliver on an average. After the recent deregulation of interest rates, banks are now supposed to offer 5.5% for deposits up to Rs100,000 and 6% above Rs 100,000. This makes liquid funds unattractive for retail investors—because most often liquid funds earn between 4%-6%. For retail investors, liquid funds have just become irrelevant against a guaranteed 6% returns in savings bank accounts. Even this is more attractive for High Net worth Individuals (HNI) who parks huge money in their SB Account. Three Private sector banks, Yes Bank, Kotak Mahindra Bank and Indus Ind Bank, have already increased the savings bank rates by 1.50% - 2.00% The following guidelines related to deregulation of savings bank interest will be effective from October 25, 2011. Banks are free to determine their savings bank deposit interest rate, subject to the following two conditions: a) Each bank will have to offer a uniform interest rate on savings bank deposits up to Rs. 1, 00,000.00 irrespective of the amount in account within this limit. b) For savings bank deposits over Rs. 1,00,000.00, bank may provide differential rates of interest, if it so chooses, subject to the condition that banks will not discriminate in the matter of interest paid on such deposits, between one deposit and another of similar amount, accepted on the same date, at any of its offices. c) Interest rate of Non-Resident (External) Accounts Scheme and Ordinary Non-Resident Deposit under savings account, which has been prescribed at 4% per annum at present, will continue to be regulated until further review. The advantages of savings bank deposit when compared to a liquid mutual fund scheme (short-term) is that investors don’t have to take the trouble of selecting the right scheme (presently each mutual funds offers 2-3 different types of short term/liquid funds) and go through the cumbersome paperwork imposed by the market regulator. Bank deposits fetch a uniform rate of interest and, after the recent Reserve Bank of India directive, interest is calculated for the number of days your cash was there in the SB Account. On the other hand, there are dozens of liquid funds and you have to choose which one to invest in and their performance can vary widely depending on interest-rate movements. In normal cases there will not be much variation, but if you invest large funds, still that matters. The present 5.50% - 6.00% interest offered by banks is guaranteed, but there is no guarantee on the mutual fund returns. Mutual Fund returns are subject to the short-term demand and supply of money. Liquid- and money-market funds allow the crucial liquidity advantage to corporate investors to park their surplus cash for the short term. Their short-term cash is normally lying in a current account which fetches them no interest. Liquid funds are ideal for them. This is evident from the fact that corporate and other institutions account for nearly 90% of the total assets under management (AUM) in liquid- and money-market funds. For retail investors, liquid funds have just become irrelevant against a guaranteed 6% in savings bank accounts

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