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Views: 147 Date : December 20 2023
“I have a balance of 50 lakhs in my savings bank account”, told an investor I met last year. On asking the reason of holding such a big amount in bank account, earning almost nothing in terms of interest, he explained that the amount has been kept handy for emergency situations.
This is not the first time I heard this statement. Many people hold large funds in savings account/FDs with an objective of safety and liquidity.
“Nothing wrong with that plan”, I said. Just that, firstly, the emergency need may or may not arise for years. Even if it arises, the requirement might be for few thousands or lakhs of rupees, and not necessarily of a large amount like 10-20-50 lacs which you currently have in your bank account. That means, may be for a need of couple of lacs, that may or may not arise in 1-2 years’ time, he is holding a large sum for years with no or low returns.
Secondly, with every withdrawal, these 50 lakhs lying in the bank account will decrease since there is no or low growth in this fund. To maintain the same level of emergency fund, he will have to add fresh money from his pocket. The growth is so negligible that it won’t be able to refill the amount withdrawn to maintain same level of emergency fund.
Thirdly, this large fund of 50 lacs lying in his bank accounts can double to one crore in 5-7 years if invested in growth funds. In fact, it would have already grown to a larger value of 60-70 lacs if it was properly managed over these years.
Lastly, on the little interest income he is earning from this fund, he is already paying 30% tax without utilizing the funds, which is an additional burden on him.
After hearing me, he seemed puzzled and asked if there was a solution which can provide him both growth and liquidity at the same time.
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