Is it time to move money from savings accounts to debt mutual funds?

Bank saving deposit rates are coming down and this definitely gives debt mutual funds an edge over the savings bank account in terms of post-tax returns. However, the comparison is not that easy.

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Financial planner: Santosh Joseph, Founder, Germinate Wealth Solutions, a financial planning firm, based in Bangaluru.

Questions asked by his clients:
1. Since banks are cutting interest rate, should we move our savings to liquid or overnight funds?
  • %Annualized Return for
  • Suggested Investment Horizon
  • N.ATime taken to double money
  • 1.7%Annualized Return for 3 year
  • >3 years Suggested Investment Horizon
  • 9.5 YearsTime taken to double money
2. Should we use liquid funds as an emergency account since it has instant redemption.

3. Are Debt funds safe for our FD proceeds?

His response to clients:
Bank saving deposit rates are coming down and this definitely gives debt mutual funds an edge over the savings bank account in terms of post-tax returns. However, the comparison is not that easy. The call gets tougher when you are in the middle of a pandemic with serious threat to your salary and job. On the other, all investment products, debt mutual funds included, are facing numerous challenges. So, here is what I advise: do not take a one-dimensional approach to your investment and savings. To put it clearly, you can not replace saving deposits with a liquid or an overnight fund. These two categories are the closest to the safe bank deposits and even sweep-in FDs.

Liquid funds are used as emergency fund by many investors but in the current time, you need a lot of money for emergencies. As rightly said, cash is king. We all should gravitate towards safety at the moment. Even though liquid funds have always honoured redemptions and all there is instant redemption, you have to think about paying online if you can't go out. You should have money in your bank account for all the emergencies that you face on a daily basis. Most of the young investors who want to earn extra and want to use a debt fund, should be very cautious. If you are 26 and don't have a big corpus, don't be adventurous. 30-40% of your 'saving' should be in your bank account. Rest of it, you can choose to put in a debt fund which matches your investment goal, strategy and horizon.
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Coming to FD proceeds. If you look at what happened in debt funds recently, the questions have been raised on short-term products that guaranteed you safer returns in the short term. However, long term funds have been untouched. If you have a slightly longer horizon and want to earn better returns, choose a medium to long-term product and invest. Remember, debt mutual funds shouldn't be your first redemption in times of need. The money that you need to grow over some time should be in the funds. No matter if the savings account is giving 3%, it is a better place to keep your emergency cash.
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