You must be familiar with the various products that banks offer. While we have already focused on banking as a facilitator for financial transactions, we look at some banking products as investment options.
Savings Bank Account
In our previous chapter on savings and investments, we had asked whether a savings account is a saving product or an investment product. The answer is yes for both! A savings account is an investment as money in the account earns interest, which is a return. We had defined savings as a pool of money that we would require for immediate needs. Savings accounts satisfy this condition as well. Most of the online transactions that we make for our daily needs are routed through these accounts. The trades that we execute on other investments are also often routed through our savings accounts. A savings account, as an investment option, has shallow assets risk and gives low returns. Therefore, it is not prudent to invest only in savings accounts.
Fixed Deposits (FDs)
When you compare with savings accounts, FDs tend to provide higher returns due to higher interest rates. Investment in FDs would mean that money is held captive in the account until maturity. FDs can be prematurely closed, but that would attract penal interest on its returns. Additionally, investment in FDs doesn’t come with the flexibility to use the money for regular transactions. However, the sweep-in and sweep-out facilities, which we have explained in the earlier chapter, come in handy. Overall, FDs are virtually low-risk, and medium returns investment products.
Recurring Deposits (RDs)
RDs, as an investment, is similar to FDs. The primary difference is that for RDs, the investment is required in monthly intervals, whereas in FDs, investment is made only once and holds until maturity. RDs don’t have sweep-in and sweep-out facilities. However, you can set a Standing Instruction (SI) to deposit the RD instalment from your savings account automatically.
Investing in banking products often gives you the flexibility to withdraw the investment in case of an emergency. They tend to offer decent returns at virtually low risk. There have been cases of banks failing and their investors losing money. However, they are rare as many banks boast a rich heritage of being in the financial industry, professional management, and strict RBI regulations. Therefore, having some investments in banking products is recommended.