Many savers still opt to keep their money in a savings account for safety. This choice provides a sense of security and ease of access without risks. However, Abhishek Walia, a chartered accountant, recently highlighted that this perceived security can be costly.
Walia shared an encounter with a client who proudly disclosed having Rs 10 lakh in his savings account while avoiding mutual funds due to perceived market risks. Unbeknownst to him, his money was silently losing value over time.
Given the gradual increase in inflation and meager 2-3% interest rates on bank savings accounts, the actual worth of Rs 10 lakh diminishes annually, as explained by Walia. For instance, Rs 10 lakh earning 2.5% interest would grow to Rs 11.3 lakh after five years. However, with a 6% inflation rate, the same amount would only hold the purchasing power equivalent to Rs 8.4 lakh presently.
To illustrate, maintaining idle cash leads to a loss of nearly Rs 3 lakh in real terms over time. Walia recommended his client to reconsider the concept of safety. He suggested keeping a portion of funds as emergency cash while allocating the remainder into a blend of short-term debt and index funds.
The result was a profit of approximately Rs 60,000 with minimal risk within a year. According to Walia, keeping money idle may seem safe but is, in fact, the riskiest approach. Regardless of the sum, unutilized cash guarantees loss. The real danger lies in remaining uninformed about financial alternatives.