Savings Accounts

Introduction to Bank Savings Account

4 min read

In this section, Introduction to Bank Savings Account we go over the purpose and importance of why you should have a savings account. The basic role of banks in a society and economy is to help people save/put away money, make investments in the form of term deposits, get loans and even credit cards. The role of a commercial bank, regardless of location is to:

  • accept deposits from the public
  • make loans
  • process payments to different parties
  • issues checks and drafts
  • offer a safe deposit facility so that valuables like jewelry and documents can be kept safe

All commercial banks offer people the facility to open a bank savings account in India so that they can get access to facilities like getting their salary deposits and other money in a safe place for as long as necessary. Banks offer account holders interest on their money – the annual interest amount varies based on the amount and deposit period. Banks use these deposits to lend money to businesses to aid in their growth and development. Thus a bank savings account in India works well for the people, banks and businesses.

How Investing can be done:

To encourage and entice customers to deposit funds for longer periods with banks, banks offer better fixed deposit rates for longer term deposits. Besides putting money in a savings account, banks also offer different mutual fund schemes to help people save money by investing. With such schemes, customer money is locked away for usually a period of 3 years, at the end of which customers can either renew the scheme or collect the money with interest, also known as dividends. The amount collected depends on the value of the mutual fund at the end of the 3 year period. So, unlike with fixed deposits, when one invests money in a mutual fund, there is no guarantee of an increase in the initial deposit at the end of the 3year term. Yet, if invested wisely, deposit can fetch interest rates higher than any regular fixed deposit rates.

Those interested in keeping aside a portion of their monthly earnings towards future savings, will benefit by opening a bank savings account in India. A nominal interest will be offered on the minimum amount in the savings account. When the balance in the account increases, one can plan and keep away excess money for a fixed period, unless it is needed. Banks offer fixed deposit rates for such money, and give offer certificate for proof of opening the fixed deposit. Banks in India compete with each other by offering the best fixed deposit rates they can for such deposits. Higher fixed deposit rates are offered for money that will be invested for longer periods. The period can range from 3 months to 10 years. The SBI Fixed Deposit list is worth going through to understand what options are available.

Banks offer various fixed deposit schemes to encourage people to save and also have access to funds which they can in turn put to better use. These schemes are term deposits and recurring deposits. With the latter, you are encouraged to save money by depositing a regular amount every month for a certain period of time. At the end of this period, one can withdraw the amount or move it to a fixed deposit scheme. Besides fixed deposits, yet another way to earn money on your savings is to invest in any one mutual fund being offered by banks.

Mutual funds may be bought through banks or private financial agencies. Unlike fixed deposits, which give offer guaranteed amount at the end of the fixed period, mutual funds may be profitable or even end up as a loss. Money raised in this manner is used to fund various infrastructure development projects or businesses by the investment agencies. Investors have the option to collect the dividend periodically or let the principal amount and dividend accumulate and collect it at the end of the term. Usually, a mutual fund is bought for a 3 year term. Deposits cannot be withdrawn until the end of the term; there may be penalties to do so.

For example, based on the amount one wants to invest in HDFC mutual funds (Housing Development and Finance Corporation), investors buy units, priced at Rs. 10/- per unit. If one wishes to invest Rs. 25,000/-, it amounts to 2500 units. Assuming, the unit value to be Rs. 15/- per unit at the end of 3 years, then with an annual dividend payment, the buyer will receive Rs. 25000 + (12500 * 3) = Rs. 62,500/- from the policy. This gives the buyer, an interest of 83%. If the unit value fails to go up based on the investments, the rate of interest can be zero or negative.

So, a choice has to be made on whether an investor wants to put his money in a fixed deposit or to buy a mutual fund. To deposit money in fixed deposits or to get mutual fund dividends credited to one’s account, a person has to open an account with a bank in India. By law, documents to open a savings account have to be provided. This process and required documents are bound to vary from one bank to another. Some of the popular banks in India include the PNB Bank (Punjab National Bank) and the SBI (State Bank of India), HDFC Bank, ICICI Bank to name a few.