Aug 04, 2017 4 min read

SBI Cuts Interest Rates on Savings Account! What Will the Smart Investor Do Now?

SBI slashed the interest rate! What should be your next move? Know more.
This is for the first time in the last six years since RBI deregulated savings deposit rates in the year 2011, SBI has cut the interest rates on savings account to 3.5%. The savings account holder will earn interest of 4% on the balance of one crore or more, while the one with balance less than one crore will receive interest at 3.5%.

There are two major factors which justify the change in rates; firstly, the low inflation in the economy is allowing banks to adjust the deposit rates according to the inflation factor, and secondly, the flood of deposits in the banks after the announcement of demonetisation.

Implications of the Interest Rate Cut by SBI:

People deposit their money in savings bank account majorly for the two main objectives; safety of funds, and a decent rate of return. Now, this surprise by SBI of depreciating the interest rates will impact the savings of most of the investors having deposits below the limit of one crore. For a country like India, which has a high proportion of savers, this move will reduce the income of many people. However, the impact on money market instruments will not be significant from this change. If you hold savings in the SBI account, then you really need to worry about the returns that you would be fetching from your deposits and need to make new strategies for better returns.

What Will the Smart Investors Do?

SBI has surprised its customers by implementing the two-tier interest rate structure and has led to chaos in the minds of the depositors. There is a famous saying which goes,"If someone offers you two options, surprise him with your third one, end the feud with the fourth one.” The smart investor should act in the similar way in this situation. They should move their investment from the savings account to liquid funds and other money market instruments which provide double the interest rates what bank account gives. Liquid funds are already well known as a substitute to the savings account because of their nature of providing superior returns on investment. Unlike savings bank deposits, investment in liquid funds travels the various trends of debt and money market instruments to fetch the best possible returns for the investors. Liquid funds are the type of mutual funds which aim to invest in the securities to provide stable income to the investor. There are several benefits of investing in these funds which make it superior to bank deposits. They are:

  • High Rate of Returns : First of all, the most crucial thing that it provides is a better return on investments. Liquid funds have the capacity to generate income in the range of 6.5-9% based on various market trends which is more than double the interest offered by bank savings account offers.
  • No Lock-In Period : These funds have zero lock-in period which means the investor can request for withdrawal of investment at any point in time. The redemption request will be processed within 24 hours of the business days. In fact, there are some schemes which offer the instant redemption facility as well.
  • Lowest Interest Rate Risk : Liquid Funds are that category of debt mutual funds which have the lowest interest rate risk as they invest in the fixed income securities with a very short maturity period.
  • No Loads : Investor of liquid funds pays no entry and exit loads unlike the other mutual funds which charge a certain amount exit load from the investors.
  • Superior to Fixed Deposits : Liquid funds are mostly opted by the investors who are known to be regular savers in various deposits at the banks. The reason behind is that along with providing better returns they also offer zero exit load facility to the investors, which means no cost on the withdrawal of the investment. Contrary, the banks deduct some amount on the early maturity withdrawals.

There are several more benefits of liquid funds which make them a better option among other debt instruments and savings account. The interest rate slash by SBI made it more contracted to earn from interest. What will you do? Going to keep your hard-earned money still into savings to earn the interest of 3.5% or thinking to switch to liquid mutual fund investments to gain higher returns? Well, we recommend the liquid mutual funds. Our smart savings account will let you gain greater benefits of liquid mutual funds with instant withdrawal facility. To know the compatibility of the various ‘Liquid Funds’ of the top AMCs according to your suitability, you must get associated with our team at MySIPonline, and and start with the best-suited one.