There was a time when wealth and prosperity meant having a fat bank balance. Remember the famous dialogue from Hindi blockbuster Deewar (1975) where Vijay (Amitabh Bachchan) tries to put down his principled brother Ravi (Shashi Kapoor) by contrasting their financial status? “Aaj mere paas buildingen hai, property hai, bank balance hai, bangla hai, gaadi hai…kya hai kya hai tumhare pass?” (Today I own buildings, properties, bank balances, a bungalow, car…what do you have?)
A fat bank balance was not just a Bollywood fantasy but the first port of call for salaried, retirees or self-employed looking to park their savings and surpluses. Savings accounts and bank deposits provided the right mix of liquidity, convenience and returns to savers. And the feeling was mutual, with banks going out of their way to attract and retain depositors as it provided them low-cost and sticky capital to deploy in lending operations.
Recent events however suggest that depositors are at best a cost head for banks and, at worst, a nuisance who eat up their employees’ valuable time and force them to invest in branches and ATM counters at prime locations.
This comes on top of a steady cut in interest rate on bank deposits in the last few years. For example, State Bank of India now offers just 2.75 percent interest on savings accounts and only 5.3 percent on fixed deposits with a tenure of 3 to 5 years.
So, it’s time depositors and savers asked the dreaded question: are bank accounts and deposits worth all these added costs and rock bottom interest rates?
The answer to the above question is both yes and no. ‘Yes’, because banks have a monopoly on financial transactions and payments through the force of law and regulation. Most transactions and payments, especially high value ones, are legal only if they are done through the banking channel.
This is especially true in the post-demonetisation era where the government is trying its best to discourage cash transactions. So there is no escape from maintaining a bank account. Banks are fully aware of their monopoly power here and trying best to benefit from it.
And the answer is also ‘no’ because there are millions of savings and investment options if one is willing to go beyond bank deposits.
This is especially true for people with substantial savings, say Rs5 lakh or more. In fact, the recent moves by banks is a wake up call for all us to move away from the lazy style of savings and investments where we sacrifice yields for the convenience that banks provide. So how much deposits should one maintain in his or her bank account?
1. It depends on your financial condition and spending pattern. As a general rule, the amount in the savings or current account should cover monthly living expenses, regular bills, discretionary spending and the portion of the savings that constitutes your emergency fund. Now you need to sit and calculate how much all these would add up to. The emergency fund is the most flexible part of this equation and could vary from person to person depending on their sense of financial vulnerability.
2. According to financial planning literature, emergency funds should not be less than three months of your living expenses and regular bills and any amount in excess of 12 months’ equivalent is believed to be excessive. Six-months’ worth of expenses are a sweet spot and every one should try to accumulate that much. This means that a family or person with monthly expenses of around Rs50,000 should not keep more than Rs4 lakh in his or her bank account.
3. Anything over and above that should be invested in high yielding instruments such as post office deposits, corporate deposits, bond funds, money market mutual funds and, of course, diversified equity funds if your age and investment horizon allows you to take risks. And some parts should also go to gold and silver. Here you don’t have to choose one over the other but spread your money over 4 to 5 different asset classes with different reward to risk ratio and different maturity profiles.
4. And lastly, don’t hesitate to leverage your balance sheet once you have accumulated a large enough corpus. Take a property loan and invest in a house or a commercial property that can provide you with recurring cash flows besides the potential upside in terms of capital appreciation. If you are more entrepreneurial you can even invest in a business that can provide even bigger cash flows and returns over the longer term. The leverage investing is now so much easier and cheaper, thanks to the decline in interest rate and a loan push by banks.
(Karan Deo Sharma is a Mumbai-based finance and equity markets specialist).
Also Read: Retirement planning: 5 tips to retire rich