Is this how you feel when you look at your returns from liquid funds?
Let’s change that feeling!
So what are Liquid Funds ?
Liquid Funds are Mutual Funds schemes that invest in very short term and safe debt instruments. Liquid Funds have a low risk of default but they give a low pre-tax return of 3.5%.The post tax returns are far from optimal as your return is lesser than the inflation rate.
There are low risk ways to enhance this 3.5% returns to up to 7% while meeting your considerations of liquidity and risk.
Sounds interesting? Multipie tells you how
Moving money from liquid funds to Savings account
Assuming you have no loans (else retiring them might be superior option),
Select Savings bank accounts can offer you higher rates of interest compared to Liquid Funds and also provide full liquidity when required.
Savings bank accounts of the following 2 scheduled commercial Banks operating under RBI licenses: AU Small Finance Bank and IndusInd Bank offer higher interest rates and a very low risk of default. Additionally, there are some other well managed private sector scheduled commercial banks that both offer good rates and safety. Thus investor has several options.
| Au Small Finance Bank | IndusInd Bank | |
| INR 1L- INR 5L | 5% | 5% |
| INR 5L-INR 10L | 6% | 5% |
| INR 10L and above | 7% | 6% |
But what about risk of this strategy?
In India, depositors have not lost money in a scheduled commercial bank since Independence in 1947.
Points to note:
People lost money recently in PMC Bank which was a co-operative bank and not a scheduled commercial bank under RBI.
Yes Bank and earlier Global Trust Bank (GTB) were scheduled commercial banks that had asset quality and other problems. Depositors were fully bailed out by the Government and RBI. Failure of a scheduled commercial bank has a negative effect on entire banking system.
AU and IndusInd are well managed scheduled commercial banks and have been chosen after understanding their detailed financials and loan book quality. Investors could choose other scheduled commercial banks also based on their personal comfort and research but should avoid co-operative banks.
Some of the parameters for their safety are:
| Au Small Finance Bank | IndusInd Bank | |
| Credit Rating | AA-/Stable | AA+/Negative |
| Capital Adequacy Ratio | 21.50% | 16.55% |
| Capitalization (INR Cr) | 28,038 | 73,416 |
| Price to Book Ratio* | 5.22 | 2.16 |
Above is a way to improve your 3.5% return to 7% in a low risk way.
What if we told you that with some short-term equity risk this 7% return can be enhanced to up to 10%. To know more about the same, read the second part of our blog
(https://blog.multipie.co/2021/01/22/how-to-enhance-your-7-returns-to-around-10/)on this subject provided you have appetite for short-term equity risk.
The path for 7% to 10% is riskier and more complex than from 3.5% to 7% but for people with some appetite for short-term equity risk, this should make sense.
👍 great idea with safety and liqudity
Good one. IDFC First Bank is also offering 7% interest rate. Any reasons why you left it out? Recently opened a digital account with them because of their upcoming credit cards which look good. Planning to keep my emergency fund in this bank. You should also mention that insurance covers only till 5 lakhs, so ideally we should not keep more than 5 lakhs in such “small” banks. Better to have another account with SBI/HDFC/ICICI/Axis
Dear Bhaskar
Thank you for writing in
Your point on 5 lacs insurance is valid and additional safeguard.
We are comfortable with well managed scheduled commercial banks for higher amounts also because post Independence no depositor has lost money in a scheduled commercial bank. even banks that had issues in past like Yes Bank and Global Trust Bank.
We don’t advocate co-operative banks where RBI may not step in (think PMC)
IDFC First Bank being a scheduled commercial bank is also a decent option. Only it does not make our personal top 2 as AU and Indus Ind have better asset quality in our view.
Note : The suffix “small” only indicates that the bank needs to maintain 75% of its asset book in small loans below 25 lacs (RBI guideline). It does not mean the bank is small. AU and IDFC both have same market cap of 27000 crs. A small finance bank is very much a scheduled commercial bank also
Naturally, if you are not comfortable with AU you could choose another scheduled commercial bank
All the best
For some reason, AU SFB is not able to complete my eKYC at my Bangalore address. Any other SFB suggestion?