How much cash should you keep in your savings bank account?

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 realised that, due to his procrastination, he had lost an opportunity to earn better returns.

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

Losing opportunities by parking excess funds in savings account

It is very important to have enough balance in your savings account, but as can be seen from the table below, the higher the excess amount in the savings account, the higher the lost opportunity to generate better returns on the excess amount.

Suppose your monthly expenses are Rs 1 lakh. To cover the expenses for six months, you maintain Rs 6 lakh in your savings account, earning Rs 24,000 in interest (4 percent p.a.).

However, if you hold Rs 10 lakh in your savings account, you're missing out on higher returns on excess funds.

Consider investing an excess of Rs 4 lakh in fixed deposits (FDs). You will earn Rs 28,000 as interest income (assuming 7 percent p.a.). If invested in hybrid or equity MFs, the probable returns of this excess amount would have been Rs 36,000 (assuming 9 percent returns p.a.) and Rs 48,000 (assuming 12 percent returns p.a.), respectively, in one year (see graphic).

By investing excess funds, you can maximise your returns and maintain an emergency corpus.

“As the interest rate of the savings account is much lesser than the inflation rate, the higher amount in the savings account would only reduce the value of more money due to the reduction in the purchasing power of the excess amount too,” says Tivesh Shah, founder, Tru-Worth Finsultants.

Panchal says that procrastination can lead to significant opportunity losses. He now understands that saving is essential, but investing can provide substantial growth and discipline as investing is crucial for financial success.

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Money to keep in your savings bank account

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.

“A reasonable proportion is 3-6 months of expenses, which ensure liquidity without sacrificing too much potential for higher returns,” says Sanjeev Govila, CEO of Hum Fauji Initiatives, a financial planning firm. Keep only what you need in your savings account, the rest should be invested, he added.

“If the corpus in a savings account is depleted upon usage, try to build it back to same level at the earliest,” says Amol Joshi, Founder of Mumbai-based Plan Rupee Investment Services.

Avoid using the amount in savings account for any impulse purchases.

Alternative avenues to invest excess amount

You can register for an auto-sweep feature with your bank, which gives customers the benefit of FD-like interest of up to 7 percent per annum, and the flexibility to access your funds at any time from the linked savings account. This auto-sweep feature is offered by several banks, including Axis Bank, HDFC Bank, ICICI Bank, IndusInd Bank and Kotak Mahindra Bank.

“Sweep-in accounts are a good middle-ground, automating excess balance transfer to short-term FDs,” says Govila. The excess funds can also be allocated to liquid or ultra short funds for better returns with high liquidity, or a mix of low-risk debt instruments, depending on your financial goals, he adds. Liquid funds offer a T+1 liquidity facility. Should a need arise, money can be withdrawn swiftly.

For tax efficiency, explore MFs. “MFs such as arbitrage funds are recommended for low-risk and tax-efficient returns. Hybrid funds are recommended for a balanced mix of debt and equity in the portfolio and for long-term pure growth equity funds,” says Joshi. Scheme selection will be driven by your risk appetite, among other factors, he adds.

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Avoid over-diversifying with multiple savings accounts 

Unless you have a compelling reason, maintaining multiple savings bank accounts is unnecessary. “To avoid penalties and charges, limit your savings bank accounts to one or two,” says Joshi. Ensure that the monthly/quarterly average balance meets bank requirements, he adds.

“To minimise risk, limit savings accounts balance to Rs 5 lakh or less per account holder per bank, aligned with the Deposit Insurance and Credit Guarantee Corporation (DICGC) insurance limit,” says Govila.

Avoid holding higher balances in a single savings account and diversify funds across two accounts to stay within the insurance limit. “This way, you will reduce the risk of losing uninsured funds in case your bank goes bust and face restrictions on withdrawals from the RBI,” he adds.

Consolidating savings bank accounts can reduce fees, streamline financial management and minimise complexity.

Designate a primary savings account for an emergency fund and link it to investments (MFs, stocks, etc.).