Why a new
saver should opt for bank deposits
It may appear to be a staid
option, but there are advantages a fresh investor cannot ignore.
One of the most commonly asked questions, typically by those who have just started earning and saving, is, ‘where should I begin?’ They mostly receive conflicting advice. Bankers and advisers push insurance and structured products; friends make stock and derivative trading look cool; and parents suggest long lasting assets, the favourite being a house. A new saver should ideally begin with bank fixed deposits.
The choice of investment instrument should be driven by the goals for which one is investing. Most goals of youngsters are short-term in nature. If the objective is to partly fund higher education in 2-3 years, one needs an investment that can be liquidated without much loss in a short period of time. To buy a car, take a holiday, get married or fund a sibling’s education or marriage, the investment chosen should be flexible and liquid, and protected from too much volatility. One cannot risk an erosion of 20% in a badly timed stock market investment.
To a beginner, a bank deposit offers a high level of convenience, flexibility and liquidity, while earning a steady rate of return. There is nothing fancy about a bank deposit, which makes it easy to understand and transact. Several product choices in the financial market do not have simple names and are not easily understood. To a new investor, an ‘XYZ Treasury investment flexible income fund, retail plan, growth option’ does not seem like a simple product. Despite its attractiveness, a short-term mutual fund product loses out as it confuses the new investor with its choices, names, details and disclaimers. Those who can deal with it, can consider this product though. When one begins to put aside savings, it is important to be able to operationalise the investment. Completing another KYC form, ensuring PAN verification for the new folio, and making sure the cheque is issued correctly are all tasks that several fail to persevere with. A bank fixed deposit, on the other hand, is the easiest to create.
Enabling a savings account for Internet transactions is all one needs to do. One can transfer the salary to a fixed deposit as soon as it is received, or can put in the balance amount at the end of the month. One-year deposits are a good choice for short-term goals and the possible need for money. Since they will have varying maturity dates, flexibility is higher. Choose the option of accumulating interest in the deposit and automatic renewal on maturity, so that the funds require minimal attention when they mature. In the electronic age, multiple deposits can be held, viewed and monitored as a single table of investments. For the detail-oriented investors, viewing the savings account, transferring funds into fixed deposits, and seeing how they are growing in value is a good start to monitoring and managing money. For the inert, the mere act of transfer to a fixed deposit puts their money to work. Even as you consider all the exotic investment options, your fixed deposit can quietly make money for you.
There are other advantages too. A young investor, who has just begun to deal with money, may not be able to correctly estimate the liquidity requirement, risks, or need for investment. Saving remains a desirable virtue with no immediate tangible motives. The first financial crunch can come when a youngster’s job is at risk. Several IT graduates are known to join big names only to seek a new job because they have been posted to a location they do not like, or have been benched. The dilemma for an earning youngster is to make job switches without having to lean on parents, or take their approval or advice. Creating an emergency fund that helps them tide over such interim periods of job changes is a tangible motivation to save.
Having about three months of pay in the bank is a good cushion while looking for a new job. Assuming a saving rate of 25% of income, this would take a year to put aside. A high saving rate in the initial months of earning, and a quick transfer to deposits that can be accessed, is the simplest way to implement this. Bank deposits can be broken before maturity, or linked to a savings account through a sweep-in facility, or used as collateral to take a loan from the bank at short notice. If one needs to take an educational loan or a personal loan, it is easier to negotiate a good interest rate with the bank where you have a record of fixed deposits.
How should you choose your bank? Consider three factors. First, you need a bank with good technological backbone, which supports error-free Internet and mobile transactions and alerts, and quality customer service. Second, your bank should have processes that are well-established, efficient and fast, so that you can create a deposit, take a loan, or make changes without wasting time and energy. Third, your deposit is your loan to the bank. A bank that offers higher rates than its peers is relatively more eager. Ensure that you lend to the bank you are comfortable dealing with, and check its reputation and standing. The Internet is filled with good, bad and malicious stories of customer transactions with banks. Your employer may require you to open an account with its bank. Unless there are specific advantages in terms of minimum balance required, service charges, loan facilities, do not change your bank every time you change a job. There is a nationwide electronic facility that now enables transferring money from one bank to another. Check with your employer and register an electronic transfer of your salary to your bank of choice.
Once you have accumulated fixed deposits of at least 3-6 months’ salary, you are set to explore other investments. You will hear murmurs about low returns and taxes. Save yourself from greedy advisers, sometimes within the bank itself, who may ask you to buy insurance instead, so that they can earn a trip to Mauritius. Beware. Investing is about asset allocation. Not all investment choices are meant to generate the highest returns, lowest tax, and lowest risks. There is a role for the simple and staid too. Begin your investment journey with the simplest investment choice.
One of the most commonly asked questions, typically by those who have just started earning and saving, is, ‘where should I begin?’ They mostly receive conflicting advice. Bankers and advisers push insurance and structured products; friends make stock and derivative trading look cool; and parents suggest long lasting assets, the favourite being a house. A new saver should ideally begin with bank fixed deposits.
The choice of investment instrument should be driven by the goals for which one is investing. Most goals of youngsters are short-term in nature. If the objective is to partly fund higher education in 2-3 years, one needs an investment that can be liquidated without much loss in a short period of time. To buy a car, take a holiday, get married or fund a sibling’s education or marriage, the investment chosen should be flexible and liquid, and protected from too much volatility. One cannot risk an erosion of 20% in a badly timed stock market investment.
To a beginner, a bank deposit offers a high level of convenience, flexibility and liquidity, while earning a steady rate of return. There is nothing fancy about a bank deposit, which makes it easy to understand and transact. Several product choices in the financial market do not have simple names and are not easily understood. To a new investor, an ‘XYZ Treasury investment flexible income fund, retail plan, growth option’ does not seem like a simple product. Despite its attractiveness, a short-term mutual fund product loses out as it confuses the new investor with its choices, names, details and disclaimers. Those who can deal with it, can consider this product though. When one begins to put aside savings, it is important to be able to operationalise the investment. Completing another KYC form, ensuring PAN verification for the new folio, and making sure the cheque is issued correctly are all tasks that several fail to persevere with. A bank fixed deposit, on the other hand, is the easiest to create.
Enabling a savings account for Internet transactions is all one needs to do. One can transfer the salary to a fixed deposit as soon as it is received, or can put in the balance amount at the end of the month. One-year deposits are a good choice for short-term goals and the possible need for money. Since they will have varying maturity dates, flexibility is higher. Choose the option of accumulating interest in the deposit and automatic renewal on maturity, so that the funds require minimal attention when they mature. In the electronic age, multiple deposits can be held, viewed and monitored as a single table of investments. For the detail-oriented investors, viewing the savings account, transferring funds into fixed deposits, and seeing how they are growing in value is a good start to monitoring and managing money. For the inert, the mere act of transfer to a fixed deposit puts their money to work. Even as you consider all the exotic investment options, your fixed deposit can quietly make money for you.
There are other advantages too. A young investor, who has just begun to deal with money, may not be able to correctly estimate the liquidity requirement, risks, or need for investment. Saving remains a desirable virtue with no immediate tangible motives. The first financial crunch can come when a youngster’s job is at risk. Several IT graduates are known to join big names only to seek a new job because they have been posted to a location they do not like, or have been benched. The dilemma for an earning youngster is to make job switches without having to lean on parents, or take their approval or advice. Creating an emergency fund that helps them tide over such interim periods of job changes is a tangible motivation to save.
Having about three months of pay in the bank is a good cushion while looking for a new job. Assuming a saving rate of 25% of income, this would take a year to put aside. A high saving rate in the initial months of earning, and a quick transfer to deposits that can be accessed, is the simplest way to implement this. Bank deposits can be broken before maturity, or linked to a savings account through a sweep-in facility, or used as collateral to take a loan from the bank at short notice. If one needs to take an educational loan or a personal loan, it is easier to negotiate a good interest rate with the bank where you have a record of fixed deposits.
How should you choose your bank? Consider three factors. First, you need a bank with good technological backbone, which supports error-free Internet and mobile transactions and alerts, and quality customer service. Second, your bank should have processes that are well-established, efficient and fast, so that you can create a deposit, take a loan, or make changes without wasting time and energy. Third, your deposit is your loan to the bank. A bank that offers higher rates than its peers is relatively more eager. Ensure that you lend to the bank you are comfortable dealing with, and check its reputation and standing. The Internet is filled with good, bad and malicious stories of customer transactions with banks. Your employer may require you to open an account with its bank. Unless there are specific advantages in terms of minimum balance required, service charges, loan facilities, do not change your bank every time you change a job. There is a nationwide electronic facility that now enables transferring money from one bank to another. Check with your employer and register an electronic transfer of your salary to your bank of choice.
Once you have accumulated fixed deposits of at least 3-6 months’ salary, you are set to explore other investments. You will hear murmurs about low returns and taxes. Save yourself from greedy advisers, sometimes within the bank itself, who may ask you to buy insurance instead, so that they can earn a trip to Mauritius. Beware. Investing is about asset allocation. Not all investment choices are meant to generate the highest returns, lowest tax, and lowest risks. There is a role for the simple and staid too. Begin your investment journey with the simplest investment choice.
Uma Shashikant. ET7MAY12
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