Good News for Savings Account Holders

We all hold savings bank accounts with different banks in India and we also know that the rate of interest that we earn on this money is a pathetic 3.5% per annum. This is very low considering the fact that our nations inflation is hovering around the 10% mark. There is some good news for all savings account holders because with effect from April 1st 2010, there is a small change in the way the interest accrued on our bank account is calculated.

Earlier Method: The minimum balance maintained in the account between the 10th and the last day of the month (say 30th or 31st) will be taken for the interest computation

New Method: The balance at the end of every day will be taken into account for interest computation.

Let us check this with a real time example:

Mr. X get his salary of Rs. 50,000/- on the 1st – Balance in Account Rs. 50,000/-
Withdraws Rs. 20,000/- for family expenditure on 8th – Balance in Acc Rs. 30,000/-
EMI on Personal loan Rs. 15,000/- deducted on 15th – Balance in Acc Rs. 15,000/-
Withdrawal of Rs. 10,000/- to meet sudden expenses on 25th – Balance in Acc Rs. 5,000/-

Now let us compute the Interest earned in the account by both ways.

As per the Earlier Method:

Amount considered for interest computation = Rs. 5,000/-

Interest earned for the month = Rs. 14.58/-

As per the New Method:

Balance considered for Interest for 7 days = Rs. 50,000/-
Balance considered for Interest for the next 7 days = Rs. 30,000/-
Balance considered for Interest for the next 10 days = Rs. 15,000/-
Balance considered for the last 6 days = Rs. 5,000/-

Total No. of days in the month = 30 days

Interest for first 7 days (Rs. 50,000/-) = Rs. 34.02/-
Interest for next 7 days (Rs. 30,000/-) = Rs. 20.41/-
Interest for next 10 days (Rs. 15,000/-) = Rs. 14.58/-
Interest for the last 6 days (Rs. 5,000/-) = Rs. 2.92/-

Total Interest Earned for the month = Rs. 71.93/-

This is nearly 5 times as that of the interest earned by the old method.

What is the Impact on us?

1. People who need cash for short term liquidity can retain the money in their bank accounts instead of transferring them to short term Fixed Deposits like 30 or 60 days because the interest on your savings account will be atleast as much as the FD and most importantly it is much more liquid and there are no penalties on withdrawal
2. People who had maintained a solid balance till the 25th or 26th of the month and had to withdraw money for some urgent reason need not lose out on the interest for those 25 or 26 days. Every ten thousand rupees in your savings account earns an interest of one rupee for every day that it is kept in your account.

Happy Investing!!!!!

Tips to make your money work as hard as you do

During such times of recession, everyone is running away from equity investments and the stock market. People are talking about safety of the invested money as primary consideration. But, there are still people like me who have not yet lost faith in the equity markets. This article is going to be about, making your money work as hard as you do. People are doing double shifts, working extra hours etc. Why not, we make our hard earned money work that way.

Let us assume you have a cash of Rs. 10 lacs idle with you and want to invest it. You can use either of the below mentioned strategies to make your money work harder than what it would in a savings account.

Strategy 1:

Deposit the money in a Bank fixed deposit that would pay you interest on a monthly basis. Let us say the bank gives you an interest of 8% per annum you would get Rs. 6666.67/- per month as interest. Invest this money in an equity diversified mutual fund. By doing so, your 10 lacs remains intact (We have taken care of the safety part here) and the interest part that is invested in mutual funds would continue to earn returns that would help you beat inflation.

Let us say the mutual fund gives you a return of 20% this year your investment would be worth Rs. 96000/- which eventually makes your total investment to be worth Rs. 10,96,000/- which is very good considering the fact that your initial investment is still in tact.

Strategy 2:

Deposit the money in a Bank fixed deposit that would pay you interest on a monthly basis. Let us say the bank gives you an interest of 8% per annum you would get Rs. 6666.67/- per month as interest. Invest this money in a Bank Recurring Deposit. By doing so, your 10 lacs remains intact and the interest part is also invested in the bank and hence this is safe too.

Let us say the RD gives you a rate of interest of 7.5%, it means your RD would mature to Rs. 83,330/- at the end of the first year which eventually makes your total investment to be worth Rs. 10,83,330/- which is very good considering the fact that your investment is entirely intact.

Strategy 3:

Deposit the money in a Bank fixed deposit that would pay you interest on a monthly basis. Let us say the bank gives you an interest of 8% per annum you would get Rs. 6666.67/- per month as interest. Invest this money in a normal Bank Account. By doing so, your 10 lacs remains intact and the interest part is also invested in the bank and hence this is safe too.

Let us say the bank gives you a rate of interest of 3.5%, it means your RD would mature to Rs. 81,537/- at the end of the first year which eventually makes your total investment to be worth Rs. 10,81,537/- which is very good considering the fact that your investment is entirely intact.

Returns Comparison:

Strategy 1:
Net Returns: Rs. 96,000/-
Returns % = 9.6%

Strategy 2:
Net Returns: Rs. 83,330/-
Returns % = 8.33%

Strategy 3:
Net Returns = 81,537/-
Returns % = 8.15%

Using the above three scenarios we can make the interest portion on our investment earn an interest or earn us an income and at the same time keeping our initial investment safe and secure. The bank would give us only 8% as interest, by using either of the above mentioned strategies, we can make our money work harder and earn a better interest.

As always, equities is the best investment class and the returns is 9.6% which is much higher than the other strategies.

Happy Investing!!!