Investing in India - 5 Minute WrapUp by Equitymaster
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Do savings accounts make better investments? 

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In this issue:
» Is fear of higher prices driving auto car sales?
» Environment ministry back to its yo-yo ways
» New 5-yr plan commences without approval or shape
» The demographic danger lurking ahead for US
» ...and more!


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00:00  Chart of the day
 
The simple savings bank account has long been considered as a foolish man's investment. An 'intelligent investor' in India would never leave their money lying around in the bank account. The interest earned on it was negligible. It offered no tax savings. It was like putting your hard earned money in a sack and leaving it under your bed. Everyone knew it was better to invest the money in a fixed deposit or a liquid fund.

Even when the Reserve Bank of India (RBI) decided to free the savings account interest rates, not many investors were interested. Things did not appear brighter even when banks started announcing higher interest rates on their savings accounts. Banks like Yes Bank and Kotak Mahindra Bank started to offer very attractive rates on savings account. Despite this, investors continued to look at fixed deposits and liquid funds as a preferred investment option.

But the Union Budget 2012 appears to have tilted the balance in the favour of savings bank accounts. The Budget has announced a tax exemption up to Rs 10,000 interest earned on a savings account. This exemption has seriously changed the way people should look at a savings account. Particularly for those who fall in the highest income tax bracket.

Let us assume that an investor invests Rs 150,000 each in a short term fixed deposit (8% interest), a liquid fund (7% returns) and a savings account (6-7% interest). The pre-tax income for the investor in each of these would be Rs 12,000, Rs 10,500 and Rs 9,000 respectively. It is quite obvious that the savings account appears to be the least lucrative of the three options. But let us focus on the post tax returns for each of the income tax categories.

Source: Economictimes

As seen in today's chart of the day, as the investor moves up in the tax bracket, savings accounts offer better post tax returns. But an equally important thing to remember here is to not put your money in any savings account. This benefit or higher returns are only available in cases where banks have increased their interest rates higher than the earlier 4%.

But does it mean that you should go through the pain of switching your bank account to that bank which offers higher interest rates? Not really. Like any other investment, the investor would have to conduct his due diligence before switching the bank account. There are several other factors which play a key role when it comes to selecting the right bank. It could be the range of services offered. Proximity to the branch is another importance factor. Sometimes it is also a function of relationships developed over the years. All these things are important when it comes to banking. But yes, after the tax relief, interest rates would also become an important criteria for selecting a bank.

Do you select your bank based on the interest rate offered on the savings accounts? Share your comments Let us know your comments on our Facebook page / Google+ page.

01:50
 
Car companies have seen stellar sales in March as demand for new models and diesel variants drove purchases. Fear of a price hike post the Union Budget also drove sales. Companies like Tata Motors, Mahindra & Mahindra and Honda Siel saw their highest ever monthly sales in March 2012. Well, customers seem to have made the right call. They prefer not to defer their purchases due to the fear of higher car prices in the coming months.

The Union Budget has proposed an increase in excise duty, registration tax and value-added tax. These would add to the cost of the cars. As a result, higher prices are expected to deter auto demand in coming months. Most auto makers have expressed their discontent over the government's decision as they know that it will impact sales going forward. But to no avail. However, they may see some relief when interest rates finally cool off.

02:25
 
How long should it take for one of the most ambitious steel plants to become operational after all the funding is in place? If we were talking about China, the matter would have closed within few months. Here in India, delays in infrastructure projects are the norm. However, nothing beats the seven year hiatus that the biggest FDI into Odisha's Posco steel project has had to endure. Thanks to the deadlock over land acquisition and the Environment Ministry's dilly dallying! Of the 4,200 acres of land required for the plant, more than 3,000 acres are classified as forest land. The government did make a partial attempt to sort things out. After several years, the Union Environment Ministry gave its approval. But, the National Green Tribunal has raised a fresh obstacle. It is feared that indecision and political unwillingness could eventually cause this major FDI project to exit Indian shores.

Currently, India badly needs long term FDI into infrastructure projects. For the government finances are clearly not equipped to fund all of it. At such time, the debacle of this steel plant could be very disillusioning for foreign investors. As it is, states like West Bengal have earned a bad repute due to political high handedness. It seems Odisha is going the same way. Thus industrial development is likely to be concentrated in few states in the country. With that social and economic inequality will manifest itself strongly. No doubt large infra projects need to be environment friendly. In fact they should be cleared only after adequate due diligence. However, such long periods of indecision are completely unwarranted. The prolonged delay to Posco's project is destined to be a major setback to India's economic and demographic dreams.

03:05
 
Government plans and economic reality have as much in common as the dinosaur and the donkey. We already saw how last year's Union Budget was a complete failure. All estimates went for a toss. Even the Budget 2012-13 seems distant from reality. It shows that the government is simply not prepared for what's going to happen over the next one year. In that case, what merit does a five-year plan hold? Or is it just another ritual that the government follows? We're afraid that's true. You see the 12th five-year Plan (2012-17) period has already commenced. Yet there is no final plan document prepared. According to certain officials, it would be ready only by November. After that it would be sent to the National Development Council (NDC) for approval. Let us inform you that this hasn't happened for the first time. Same was the case even with the previous two five-year Plans.

Now the most important point- The Plan has set an average economic growth target of 9% during the 12th Plan. For the financial year 2012-13 (FY13), the Budget has assumed a growth of 7.6%. The Economic Survey has estimated the growth for FY14 at 8.6%. This means that in case the Indian economy has to grow at an average rate of 9% during the 12th Plan, the growth will have to be over 9.5% in the last three years of the Plan. Is that really achievable? We really doubt given the kind of political paralysis and resistance to reforms our country is witnessing.

03:40
 
So far, we've heard about demographic dangers lurking ahead only for countries like China and Japan. However, a recent paper by a couple of demographers has thrust the US too onto the same stage. The demographers have outlined two major issues. One, woman participation rate in the economy seems to have hit some sort of a ceiling. Obviously, this is not good news as there will be lesser number of people going forward to boost the nation's GDP. The second issue is the overall graying of the population of USA.

Let's use numbers to put this issue in perspective. The paper argues that in 1950, there were more Americans under 25 than over 45. By 2050 though, the share of seniors will nearly go up three times while that of twenty some things will decline. What this will do is it will increase the burden on the young to feed and take care of their old. The end result would of course be slowing economy and even, frequent and deeper recessions. Not all is lost however. By undertaking some radical reforms on the immigration and housing policy fronts, the outcome can be made less damaging as before. Time though is fast running out.

04:30
 
In the meanwhile, the Indian stock markets are trading on a positive note. At the time of writing, BSE Sensex was up by 87 points (0.5%). Stocks in the realty and consumer durables space were leading the gains. The other major Asian stock markets closed the day on a mixed note with Indonesia and Korea closing in the green while Taiwan and Hong Kong ended the day in losses.

04:55  Today's investing mantra
"I think you have to learn that there's a company behind every stock, and that there's only one real reason why stocks go up. Companies go from doing poorly to doing well or small companies grow to large companies." - Peter Lynch
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6 Responses to "Do savings accounts make better investments?"
S.K.Damani
Apr 2, 2012
The union budget and the high media coverage given to it has lost all its meaning. We should do away with this exercise. What ever is said on the floor of the house, is generally wishful thinking made to palate some people but fool most of the others. All that is said out is generally not likily to be achieved. The politicians, (0% of them do not understand a bit about it, they are there only because it is high profile. They are only interested if any thing is dished out to there constituency. Regarding other matters they hardly understand anything. MAny of them would not know what is GDP and what is current A/c deficit or fiscal deficit.
thus the budget is a total hog wash. Regaridng planning commission, that is another way of providing huze perks and feeding the beaurcrats, who just juggle the figures around. Remember the figure of Rs. 28/- sufficient to live in India. Absolutely marvellous.
Like 
Dr M.Chandrashekhar
Apr 2, 2012
I do not think that Savings Bank account would be a prudent Tax Saver. I wonder if this 6% interest on Savings Bank by Yes & Kotak Mahindra Bank would last even for a year !
I feel Mutual Funds are a better option .
Like 
Ankur Malik
Apr 2, 2012
The comparison between saving bank rates and other options is flawed. Current post tax returns on Liquid funds are between 7.25-8% (under daily dividend reinvestment scheme). With current tightness in liquidity in the system, I have been getting 8% post tax for the last 1 week in my Liquid Fund. Secondly, even if we argue current interest rates on STFD's and LMFs are high, I can assure you that in a lower interest rate scenario, the interest rates on Savings account will also come down. As with deregulation, larger banks will be first one to reduce their saving bank rates (Earlier they were forced not reduce it below 4%) Like 
Shyam Bhattad
Apr 2, 2012
It will be prudent to select the bank on the basis of services offered to the investor e.g. quick response, completion of pass book/statement of account, immediate attention for depositing cash and least time in passing cheques etc.
Interest on savings account were overlooked for quite some time where as it is the best way of deposit from the banks point of view. Bank has to pay interest on day to day balance in saving accounts. It is well known fact that investors are not keeping huge amount in saving account as the earning is just half then fixed deposit. But same time investor has liberty to withdraw cash as and when needed. Which is cumbersome in fixed deposit. But the rebate of IT proposed in recent union budget will certainly attract investor to keep the money in saving account at least up to the limit of tax rebate amount. This will increase liquidity for investor and short term funds for banks.
Like (1)
kranthi Mark
Apr 2, 2012
Its obvious to say savings account will earn good returns . But the problem is Inflation ...Raising costs , If your savings account is giving high returns means its indication of tight liquidity in the economy and in the banking system as whole. See in the case of country like Mongolia on a SB account whopping 13.5% rate of return per annum . These are few pockets of fixed income opportunities to take advantage or park your money fo some time to take the advantage of contraction of liquidity . In 1982 the Fed rate on 10 year US federal bond was 18% .If you would have invested it would have been the best investment in your life time . Now the same rate is lessthan 3%. One need to keep in mind interest rate cycles of very longterm cycles and You need take advantage by shuffling your money between fixed to equity depending on your risk tolerance levels or else you have to face unintended consequences. wealthmills blogspot com Like (1)
Srinath
Apr 2, 2012
Liquid MF don't attract tax at the hands of the investor, as dividend from the fund is tax free, only the small appreciation in NAV between the time you invest and redeem will attract tax. Like (1)
  
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