SANJAY KUMAR SINGH Keep cash according to family’s income profile
Households in India are holding a high level of cash. According to the Reserve Bank of India’s (RBI’s) Annual Report for 2017-18, household savings in cash have climbed to a peak level of 2.8 per cent of gross national disposable income — the highest in the last seven years While households should hold an optimum level of cash to meet their day-to-day requirements, keeping too much cash can be counter-productive because this money can be deployed elsewhere to earn higher returns.
Some financial advisors suggest dividing your liquid money meant to meet regular expenses into three parts. Says Nitin Vyakaranam, chief executive officer and founder, ArthaYantra, “Don’t keep more than a week's expense at home. Have another one month’s expense in a bank savings account. Any amount above that should be kept in a liquid fund.”
Households also need to maintain a contingency fund. They should keep a month’s expenditure as cash in hand. This should be kept at home and used only in emergencies, like the recent floods in Kerala, where people had money lying in bank accounts but could not access it because ATMs and branches were not functioning. This money can also come in handy during health emergencies. “A double-income family should have three months of expenses in the contingency fund. One month of expense should be kept in the form of cash at home, and two months of expense should be kept in a savings account or liquid fund
(1+2 savings plan). A single-income family should have a 1+5 saving plan, while entrepreneurs should follow a 1+11 plan,” says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors.
Different families need to have different levels of contingency savings because their risks vary. In a double-income family, chances that something will happen to both the partners simultaneously, say, both falling ill, are low. In a singleincome family, the risk, being concentrated in one person, is higher. An entrepreneur faces even higher risks as he could face long delays in getting paid by his clients while he still has salaries and other bills to pay.
Liquid money (both expenseand contingency-related) may be kept in a savings deposit (returns 3.5- 4 per cent; some offer 6 per cent), preferably one with an auto- sweep facility, or in a liquid or ultrashort term fund. With an auto-sweep account, one doesn't need to keep much money in the savings account. Any amount above a specified threshold gets swept into a fixed deposit. When the customer needs the money, it gets automatically swept back from the fixed deposit to the savings account. Such an account offers the liquidity of a savings account and the return of a fixed deposit (for as long as the money is in the fixed deposit).
Liquid funds are another option in which you can invest your cash/liquid component. They pay out money within 24 hours if you apply for redemption before the cut-off time of 2 pm. Some fund houses like Reliance and DSP offer an insta redemption facility, where the money gets credited to your savings account immediately. Sebi has imposed a limit of ~50,000 on daily withdrawals from these insta redemption funds.
Select a liquid fund that invests most of its portfolio in paper rated triple-A and A-1. Says Dwijendra Srivastava, chief investment officer, fixed income, Sundaram Mutual Fund: “Retail investors may find it difficult to assess the credit risk of a liquid fund by themselves. They should either go with a fund house well known for managing debt funds, or take a financial advisor’s help. Another option is to consult the ratings provided by rating agencies.”