Everyone thinks of investing, but few consider optimising their investments by utilising the various options at their disposal. In this note, we explore the opportunity that investors always had staring them in the face, but rarely considered.
For too many investors, saving money means putting their hard-earned income in a savings bank account. All investments are then routed through this savings account. Nothing wrong with that, you may feel. We agree that this is 'standard practice' so investors can't be faulted for showing no inclination of deviating from it.
But when you consider the pittance investors make on their savings account (currently 3.50% per annum), it is surprising that this 'standard practice' still finds wide acceptance. You say, investors do not have any option because they can hardly be expected to hike the savings account rate from 3.50%? We say there is a far more rewarding option that is staring investors in the face.
We did an analysis comparing investments made from a savings bank account with that made from a debt fund. The results are there for all to see. For this we have made some assumptions:
There are two investment scenarios. In the first one, the client starts a monthly systematic investment plan (SIP) of Rs 50,000 over 12 months in a diversified equity fund, i.e. total investment of Rs 600,000 over a year from his savings bank account.
In the second one, the client first invests lump sum in a short-term debt fund (alternatively, this can be a liquid fund) and then does a systematic transfer plan (STP) in the same diversified equity fund for the same amount and tenure.
In the savings account and the short-term debt fund, he has exactly Rs 600,000 at the beginning of the first month. He neither withdraws any money nor does he add to it. At the end of the 12th month, he is left only with the interest/capital appreciation in his bank account/debt fund.
The savings account draws an interest of 3.50% p.a. (this is a fact, not an assumption). The debt fund generates a return of 4.75% over 12 months; this is a conservative assumption, liquid funds and short-term plans are known to deliver higher growth.
The client falls in the highest income tax bracket, i.e. 33.66%.
Investment tenure in the debt fund is more than a year.
SIP Vs STP: A no-brainer
| Investment amount (Rs) |
SIP/STP (Rs)* |
Interest/ Return p.a.(%) |
Amount (Rs)** |
Effective post-tax return (Rs) | |
| Savings account | 600,000 | 50,000 | 3.50 | 9,842 | 6,530 |
| Short-term debt fund | 600,000 | 50,000 | 4.75 | 13,465 | 12,118 |
** Returns on reducing balance in savings account and short-term debt fund at year-end.
It is evident from the table that the STP has proved to be a lot more rewarding. At year-end, before the tax adjustments, the investor has Rs 13,465 in his mutual fund; compare this to a puny Rs 9,842 in the savings account. The STP option has generated a 36.8% higher return than the SIP option.
The disparity in results is even more striking when we take into consideration the post-tax returns which the investor will actually receive. Thus, at the year-end the investor will have Rs 12,118 in his mutual fund as compared to Rs 6,530 in the saving account after tax adjustments. So the STP has generated a 85.57% higher return than the SIP.
Hopefully, we have shown investors the way to break from the standard practice of investing through a savings bank account to a more lucrative investment option.
Mutual funds are replacing the traditional avenues of investments like stocks, bonds, fixed deposits and even gold (with the launch of gold exchange-traded funds) and real estate (with the launch of real estate investment trusts). It's about time they even replaced the savings bank account.
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