Use smart cash management to optimise returns on short-term funds

HDFC Bank has reduced its savings account interest rate from 3 per cent to 2.75 per cent. Several other large banks also offer interest rates below 3 per cent. Given such low returns, savers need to manage their short-term money more efficiently.

Maintain limited balance

A savings account offers convenience. “Premature withdrawal from fixed deposits or redemptions from mutual funds can be avoided,” says Avinash Luthria, Securities and Exchange Board of India-registered investment adviser and founder, Fiduciaries.

 

However, one should avoid keeping excessive funds in savings accounts. “They should be used mostly to keep running expenses and not as a savings instrument,” says Abhishek Kumar, Sebi-registered investment adviser and founder, SahajMoney.com. He advises maintaining the minimum balance requirement, one month’s expenses, and a buffer for emergencies.

Consider liquid funds

Investors may consider liquid funds for better returns on short-term money. “On a steady-state basis, liquid funds should deliver the repo rate plus a spread over and above it. The spread can vary, but it is always likely to be positive. The return from a liquid fund would, in all likelihood, be higher than the savings account interest rate,” says Sandeep Bagla, chief executive officer, Trust Mutual Fund.

 

Luthria recommends direct plans of liquid funds to reduce costs and improve post-tax returns.

 

“Most funds have a facility where there is instantaneous transfer to the savings account,” says Bagla. Larger amounts may get credited the next day. Where the instant transfer facility is not available, redemptions are processed on T+1 (if order is placed within cut-off time) or T+2 (if placed after).

 

Liquid funds also offer a tax advantage. “In fixed deposits, interest is taxable annually even in cumulative options. In liquid funds, the gain is taxed at the time of redemption,” says Luthria.

 

Liquid funds carry some credit and interest rate risk. “They invest in short-term papers issued by governments and corporates. There are sectoral, issuer, and group-wise exposure limits, which help in risk mitigation,” says Bagla.

 

Luthria warns that the level of risk can vary from one fund to another. “There is no guarantee that a liquid fund cannot have a negative return for, say, a day. But in practice, the risk liquid funds carry is of an acceptable level for most retail investors,” he adds.

 

Bagla recommends reviewing ratings from agencies like ICRA before selecting a fund. Luthria suggests focusing on the expense ratio and sticking to established fund houses.

Explore auto-sweep facility

Most banks offer an auto-sweep facility to their savings and current account holders. “Money in excess of a specified limit is transferred to a fixed deposit offering an interest rate higher than a savings account. The account holder also enjoys the flexibility to withdraw the funds present in the account,” says Santosh Agarwal, chief executive officer, Paisabazaar. When the amount in the savings account falls below the specified limit, the differential amount gets deducted from the fixed deposit and is swept into the savings account.

 

Kumar suggests setting the transfer threshold after factoring in the minimum balance and regular monthly expenses.

Allocate to small finance banks

Small finance banks usually offer relatively higher interest rates on savings accounts. “Like public and private sector banks, small finance banks are also regulated by the Reserve Bank of India and deposits are insured by the Deposit Insurance and Credit Guarantee Corporation, with total coverage limited to Rs 5 lakh,” says Agarwal.

 

Consider spreading your money across multiple small finance banks to avoid breaching the insurance limit.

Consider SFBs for higher returns 

Small Finance Bank (SFB)	Interest rate*	Account balance range
Utkarsh SFB	6.25%	Balance above ₹1 lakh, up to ₹5 lakh
North East SFB	6.00%	Any amount
ESAF SFB	5.50%	Balance above ₹2 lakh, up to ₹5 lakh
Ujjivan SFB	5.00%	Balance above ₹1 lakh, up to ₹5 lakh
Jana SFB	5.00%	Balance above ₹1 lakh, up to ₹5 lakh
*As on April 14, 2025
Source: Paisabazaar.com