Loss Opportunities By Parking Excess Funds in Savings Account: A Financial Wake-Up Call

Understanding the Risks of Excess Savings

Sunny Panchal, 48, leads the marketing department at a private company in Pune. He has consistently saved a significant portion of his income. Yet, his conservative approach and procrastination to invest have led to an unexpected opportunity loss.

Over the past three years, he had accumulated a sizable surplus in his bank savings account. However, despite his best intentions, he kept postponing investing his funds.

"I'll do it next month," he would tell himself.

Months passed, and Panchal’s savings account continued to earn a modest 4 percent interest. Meanwhile, the investment market flourished, with equity-oriented mutual funds giving 20 percent compounding annual growth rate (average of equity diversified funds) over the past 3-year period (Source: ACEMF).

The opportunity loss was staggering. If Panchal had invested Rs 5 lakh three years ago in equity-oriented mutual funds, it would have grown to Rs 7.5 lakh (assuming a 15 percent annual return). Instead, his savings account earned only Rs 60,000 (4 percent interest p.a. on bank savings account). He realized that, due to his procrastination, he had lost an opportunity to earn better returns.

Financial Planning: Allocating Savings Wisely

Like Panchal, many investors fall prey to procrastination, leaving their hard-earned money idle in savings accounts, potentially missing out on substantial growth.

It is crucial to maintain a necessary balance in your savings account. As can be seen from the table below, the higher the excess amount in the savings account, the greater the lost opportunity to generate better returns on that excess.

• To cover monthly expenses of Rs 1 lakh for six months, some maintain Rs 6 lakh in their savings account, earning Rs 24,000 in interest.
• However, holding Rs 10 lakh results in missing out on higher returns from fixed deposits or mutual funds.

Investing excess funds smartly can maximize returns while maintaining an emergency corpus.

Investment Alternatives for Excess Funds

Financial advisors recommend that besides monthly expenses and investments, funds should be kept for medical requirements, job losses, and short-term liquidity needs like emergency travel or urgent purchases.

Consider signing up for auto-sweep features offered by banks, which can provide FD-like interest rates for excess funds while keeping liquidity intact. Liquid funds can also be an excellent option for enhanced returns with flexibility, offering T+1 liquidity.

Moreover, it's important to avoid excessive diversifying with multiple savings accounts. Maintaining one or two bank accounts can prevent unnecessary charges and streamline your financial management.

Conclusion: Making Informed Financial Choices

The economic landscape is clear: managing idle money efficiently is crucial. Procrastination in investing can lead to significant financial losses.

Incorporate a smart strategy for what you keep in your savings account vs. what should be invested to safeguard your financial future.