Debt Funds vs Savings Account

POSTED BY Jagoinvestor ON July 17, 2012 1:11 am COMMENTS (6)

With the interest rates in savings account reaching 6-7% (even without auto-sweep), Is stashing of emergency fund in savings account better than putting it in liquid short term debt funds? Would the short term debt funds give a much higher roi than savings account?

6 replies on this article “Debt Funds vs Savings Account”

  1. Renu Chauhan says:

    Hi BanyanFA.. Point noted 🙂

  2. BanyanFA says:

    Renu,
    Just a small correction, the current budget has provided a tax free threshold of 10K for interest on saving accounts. Hence it may be beneficial for that reason.

    However, if you look into it from all angles, it makes sense to go via the debt / liquid fund route :
    1. You get lower taxation impact if you are in 30% bracket. Interest would get charged 30%, while dividend option on debt funds will cost you less than 15% (check out http://insight.banyanfa.com/tax-implications-of-mutual-funds-on-residents-and-nris/ )
    2. The returns in Liquid funds are over 2-4% more than the saving bank interest;

    Regards
    BanyanFA

  3. Amit says:

    What if I have selected Growth option for my Dept / Liquid Fund… How much tax I have to pay?

  4. Renu Chauhan says:

    Also do take the tax factor into consideration.. Whatever interest you get on your money in savings account is taxed as per your tax slab. Where as if you opt for a dividend option in short term & ultra short term plans, they(dividends) are tax free in investor’s hand..

  5. But that 6% is only on the balance above 1 lac, not below that. so if you have 1.2 lacs in your bank , you will get 4% on 1 lac and 6% of 20k , not exactly what you thought !

  6. Dear ….., Apart from yes Bank & Kotak Bank, not many front line banks are offering this 6-7% interest rate so in that sense, parking money in short term or ultra short term or liquid fund is better idea after availing sweeping FD facility on a part of emergency funds.

    Thanks

    Ashal

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