Banking has been one of the oldest industries in India with Bank of Hindustan being considered one of the first banks established in 1770. State Bank of India was founded in the year 1806 as Bank of Calcutta and since then has grown rapidly to be the leading bank of the country with more than 18,000 bank branches.
A bit about Savings Accounts and Mutual Funds in India
Opening savings accounts have seen a massive transition over the decades –
There were days, not so long ago, where in terms of returns every bank used to offer 3.50% p.a. interest on the lowest balance between the tenth and the last day of a month. In terms of ease of opening, having a Savings Bank account was considered to be a privilege. One could have a savings account only upon being “introduced” by another bank account holder. The account opening necessarily required the presence of a bank official.
And there are days today, where in terms of returns, the savings interest rate is deregulated with some banks offering interest rate upwards of 7% p.a. couple with monthly pay-out of interest and in terms of ease of opening, we have banks offering online account opening where a person can remotely & independently open a savings bank account sitting at home or office even at midnight.
Mutual Fund investment is a relatively newer tool with India debut in the year 1963 with the formation of UTI. Since then the industry has grown rapidly. Anybody watching television today or tuning in to the radio cannot miss the Mutual Fund Sahi Hai campaign which promotes investing in mutual funds by highlighting benefits and breaking the myths associated with it.
As per the reports released by the Reserve Bank of India, the aggregate savings deposit of scheduled commercial banks, as of March 2018 is estimated to be approximately at Rs. 38 trillion. As per AMFI reports, as of March 2018, the mutual funds AUM is estimated to approximately at Rs. 23 trillion. The strides taken by the mutual fund industry are impressive indeed.
Why does one need a Savings Account?
Today, we need savings account more out of habit, we need it because everyone has had it for years. Our parents had it and so do we have. Our salaries come into the savings accounts; business owners park a certain percentage of their profits in the savings accounts. Savings accounts are meant to be for the “Savings” you do. There are various factors which influence one’s decision to open a savings account – the rate of interest, trust/faith, number of branches / ATMs, charges, facilities provided, offers and benefits. Among other things, we broadly need a savings account:
- To park our excess funds and earning from it
- To remit money to a friend or a service provider for service availed of an item purchased
- To pay bills
- To cash out when needed
Why does one need a Mutual Fund?
Really? Who said one needs mutual fund? You can easily be without a mutual fund, but you will be looked at with suspicion if you earn money and you do not have a savings account as an individual. Mutual Funds come in different sizes and shapes; you can choose the one that suits you well, or even choose multiple funds and different funds at different points in time very easily. The “digital” has crept into mutual funds as well and each passing day, it is getting easier and easier to invest. But bottom-line remains, you don’t “need” a mutual fund as a necessity.
Can we challenge the norm?
As I mentioned earlier, we have a Savings account because mostly everyone in the family has or had one. It is a norm, so we have a savings account. We have digital wallets making way into our lives albeit with a few limitations attached to it. We have mutual funds occupying our mind space now with the amount of promotion happening in the media. The returns offered by mutual funds can potentially beat any good instrument (though it can tank and eat into the principal amount as well) and can offer you assured returns depending on the category of mutual fund you choose.
My challenge here is to break the norm and discuss if a mutual fund can be your new savings account.
Imagine a situation where your salary is credited to the folio you decide, the restaurant transaction is paid off through another folio which you have earmarked for expenses, your rental goes through a third folio which you have made for that purpose. We would need to offer a remittance and bill payment license to the Asset Management Companies (AMCs).
Benefits of mutual funds over Savings accounts
On the two key points, we spoke about earlier i.e., return and ease of opening – mutual funds offer better flexibility.
On the returns front, you can choose folios depending on your risk appetite for a higher return.
On the ease of opening front, mutual funds today have achieved what the savings account opening could not, it is the common KYC. If you have done your KYC with one AMC or folio you don’t need to undertake KYC each time you invest, your KYC details can be easily fetched basis your PAN.
What is mentioned in the write-up here is an idea – it will surely have pros and cons, it will have regulatory implications, it may have been tried or thought about earlier – but I think it is worth a debate.