There's news for those of you who believe in parking your money in good old-fashioned fixed deposits. The Reserve Bank of India, through its mid-term Annual Policy statement last week, has allowed banks to offer a seven-day fixed deposit for amounts lower than Rs 15 lakh (Rs 1.5 million).
So even small depositor can access this product. While most banks are yet to introduce the product as they are weighing its pros and cons, IndusInd Bank has already done so.
It has launched a seven-day deposit carrying an interest rate of 4.25 per cent per annum. Bhaskar Ghose, managing director of the bank, said the aim is to cash in on the opportunity to grow IndusInd's retail deposits base.
Other bankers, however say that that when introduced, these seven-day FDs would be priced somewhere closer to the savings rate, which is currently at 3.5 per cent.
Before this, the minimum period for which you could put money was 15 days. If you leave money in your savings account, you earn 3.5 per cent per annum interest, on the minimum balance maintained in the first ten days of each month.
The interest is credited to your account semi-annually. The FD advantage is that the interest will be credited to your account after seven days and you can just let it be added to the principal and earn even more interest. In short, play the compounding card.
Remember, the tax that you pay on interest earned from an FD or a savings account is the same. Only, in the case of interest earned on a savings account, tax is not deducted at source by the bank, while in the case of an FD it is.
So if your banker offers you the same rate for a seven-day FD as that on your savings account, FDs are a better bet.
But, you could probably do better. You could, for instance put your money in a liquid scheme of a mutual fund. There are several advantages. The first, as the name of the scheme suggests, is liquidity.
In other words you can put your money for as short a time as one day or two days and withdraw it as and when you require.
According to Rajiv Anand, head, investments, Standard Chartered Bank, most funds give you cheques across the counter, at a specified time in the morning.
So there is no worry on that count. While it is true that you can request the bank to break the FD if you need the money, you will have to pay a penalty. Normally, banks tend to deduct a whole per cent as the penalty.
Second, the liquid scheme is more tax efficient. You earn a daily dividend and apart from the dividend distribution tax of 12.5 per cent, the returns are not taxed in your hands.
The interest you earn from an FD is taxed at the rate that you pay on your normal income, which could be 30 per cent at the highest level. The two per cent education cess is applicable to both products.
Finally, and most important, the returns from a liquid scheme should be better than that from an FD.
Liquid schemes or floaters have been giving returns in the region of four per cent per annum.
According to Anand, since they are less sensitive to interest rate changes because of the instruments that these funds invest in, the returns should be better than that offered by banks, especially since banks have other costs to take care of.
So together with the lower tax rate and liquid funds present you with a better option. Unless, of course banks are offering you significantly higher rates.