Bank Account: Are we using bank account effectively? – Part-1: Finance Trading Times

Bank Account: Are we using bank account effectively? – Part-1

Continuing on the comments which I received for the calculations I covered on my previous post IPO-Should you invest in IPO, I really feel happy that the readers have now started to look at the fine prints of the calculations. Many of you have asked the question that saving bank accounts hardly pay 3.5% to 4% interest while I’ve taken 5.5% in my calculations. Then, the second question was that IPO process and refund takes only 3 weeks and not 2 months. These are valid questions and I feel happy that we are now getting into looking at the nitty-gritty details of finance.
However, still I feel that people are not reading and grasping effectively. Let me explain the fine details further.

In my previous post, I’ve mentioned the following:
The entire process starting from IPO subscription application to getting the refund takes around 2 months. Even if it takes 1 month, the mechanism by the banks to calculate interest ensures that you loose the interest for 2 months.

Then, I’ve also mentioned the mechanism banks use to calculate interest:
For people who don’t know, the banks pay interest only on the MINIMUM amount of money in your bank account, between the 10th and last day of the month. For e.g., if I have 2 Rs. in my bank account of 10 July, and I deposit another 1 Lakh on 11 July, I will get interest only on 2 Rs. because the minimum amount that I had between 10th and last day was only 2 Rs.

One of the readers has left the comment that it takes only a maximum of 3 weeks time to get the refund. It may be true, but my experience is that it takes a minimum of 1 month. Let’s look at an example: Suppose there is an IPO that opens on 15th July. You apply for the IPO on 15th July by taking the money out of your bank account. Even if it takes 3 weeks, it will be 6th August till you get your cheque; maybe later because of postal delays. Deposit it for clearing, it will be another 3 days to clear the cheque. Then, if there is a weekend in between, the money gets credited to your account only on Monday. This ensures that the money comes to your account only on 11th August or later. So ultimately, you will have to loose the interest for 2 months – July as well as August. Remember, we are talking about the fastest IPO process of just 3 weeks. In practical sense, no IPO gives refund before a month. Even the ECS system takes a month for refund. So ultimately, you loose the interest on your money for 2 months.

Second point: regarding the 5.5% interest rate. How much do you play around with your money? When you invest for an IPO, do you apply with all the money you have and don’t keep anything in your bank account? I’m sure, your answer would be NO.

This brings us to a fundamental question: Are we using our bank accounts effectively? Are we keeping enough money for emergency requirements in our bank accounts?

Personally, what I do is as follows: I keep a minimum of 25,000 Rs. in my savings bank account at any given point of time, like an emergency fund. May be I will need the money for an emergency reason, like hospitalization of a family member, or similar such unfortunate situations. I know smart-alecs will suggest having a credit card with 1 Lakh limit, but not all hospitals and emergency situations can be tackled by swiping a credit card. Moreover, establishments may charge 2-3% extra on credit card usage, which is not very good. If the establishment does not charge anything for credit card, then I will happily swipe my card. But there is definitely a necessity to keep an emergency fund in your savings account.

Any money above this 25,000, I ensure that it gets converted to a Fixed Deposit. The advantages of Fixed Deposits compared to a savings account are as follows:
• You don’t have to worry about the minimum amount between 10th and last date of the month. An FD gives you fixed interest for a fixed period, irrespective of the date it was issued.
• FD earns higher interest as compared to a savings bank account. The 5.5% rate that I mentioned was for FD.

Continue to Part II of this article:
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5 Comments: Post your Comments

Anonymous said...(on 29 July 2007 at 23:24 )  

You said that the interest is calculated on the following:

"between the 10th and last day of the month"

do you mean that " on the 10th day and the last day"....Or is it "Between these days" ???

Anonymous said...(on 30 July 2007 at 08:05 )  
This comment has been removed by a blog administrator.
Siva Prasad said...(on 30 July 2007 at 22:14 )  


You are taking the worst of worst cases for getting IPO refund. First thing on the 16 day of your IPO close date you must get a cheque back or ECE refund. As you mentioned ECS will never ever take one month for refund. It totally wrong. If ECS would take a month, why do we go for electronic transfers, why not simply use cheques.

Also the cheque would just clear in 1 day (next working day) and banks work on saturdays. So even if you get back cheque in 17th day (saturday) your money will be credited into your account on monday 19th day morning.

These days no cheque will clear in 3 days, max 2 days. Infact RBI has implemented in some cities where outstation cheques would clear on the same day itself. This is not yet implemented all over india.

I have been applying in IPOs for the past many months and never found any delays in getting refund later than 17th day. Its SEBI rules that registrars should abide to refund in 15 days.

One more point you mentioned FD rates of 5.5%. They are old days. FDs now range from 9%-10%. RBI's PLR itself 7.5%.


Vishal Raina said...(on 31 July 2007 at 01:03 )  

SivaPrasad Garu,

First read the article clearly before making so much noise about the mistakes. There are no mistakes in the article, all the calculations are correct and justifiable. As shobhit always says: First of all, learn to take the right nos. for the right period of time and then make the right calculations. Read all the articles in this blog.


shashi said...(on 31 July 2007 at 09:16 )  

I wonder why such comments find place in this blog like the one left by knicksgr10917.
Mr Sobhit, what is your opinion about recurring deposits used as tools for accumulating wealth, particularly in post offices where you can continue to earn the same interest for 10 years or discontinue after 5 years.
Also what is your opinion on PPF which apart from the compound interest of 8 % has been the most attractive tool for getting tax rebates. Do you feel they are inferior to Govt. bonds??
What is your opinion on investing in SIP style into the top 5 or 6 stocks of different sectors like banking(say-SBI)Automobile(say-Tata motors),FMCG(say-HUL),Steel(say-Tata Steel),IT (say-Infosys),Reliance Industries,L&T,
Rel.Com( telecom sector) in addition to the debt instruments mentioned above.
These ,plus some money in ETF/IF as we should not restrict ourselves to any one form of investment.

Wish you all happy and fruitful trading and investing activities with safety! = = = Post a Comment

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