Diversifying Savings.

Diversifying Savings - Money Matters.

Savings has a major role in deciding the financial future of an individual. It is savings which saves people in adverse economic situations. Savings, like everything else, are prone to risks. To mitigate risks, it is advisable to save through many mediums instead of just one or two. Money should never be kept in a single account. It should be saved in different ways. When we save money through various forms or mediums, we diversify our money and thereby reduce risks.

Meaning of Diversification.

Diversification in savings means channelising and distributing money to various financial avenues. It is the process of saving money in different accounts instead of a single account. It is the process of diverting money from our single savings account to other modes of saving.

Why Diversify Savings?

Diversifying savings and investments is important to make money grow in a natural way. Diversification in savings and investments is necessary for sustainable growth. As savings increases, diversification becomes easy and meaningful.

Although maintaining a single account is easy, it has following drawbacks.

• When a person maintains just one account for savings, his money may not grow the way it should. Transactions may be more in it but savings could decline primarily because of excess withdrawals.

• The interest on deposited money may not increase and so is not beneficial for long term savings.

• There could be difficulties in withdrawing money frequently, particularly if the account has kept limits for that or when the account could not be operated due to technical reasons.

• An element of risk is also present in maintaining just one account. If the account holder loses money due to theft or fraud or in some other way, he has to suffer more as there is no other savings to rely on.

Ways to Diversify Savings.

Savings can be diversified and it should be done in a proper manner. While there are many avenues for people to select, it is important to understand the benefits which each avenue will provide before investing. Diversification should be fruitful. The invested money should grow with time. Therefore, the avenues should be selected carefully.

There are five formidable avenues for diversifying savings. They are:

(1) Banks: Banks have a major role in saving peoples' money and they provide three types of accounts for this. They are the savings bank account, the recurring deposit account and the fixed deposit account.

• The most primary account is the savings bank account which is indispensable in today's world as it provides many facilities apart from savings. Money kept in a savings bank account grows as per its rate of interest which currently is around 3% annually.

• When the same amount of money is divided and kept in two accounts: one being the existing savings account and the other one a fixed deposit, the benefit increases marginally as the rate of interest is above 5.5% in FD.

• Recurring deposit is yet another way to save money and it too offers around 5 to 6% interest annually. RD functions as a savings enabler. It helps to build up savings for life insurance premiums and for fixed deposits.

(2) Life insurance: Life insurance is a definite way to diversify savings. Life insurance is an unavoidable necessity. People who don't have life insurance cover or have less cover are missing the true financial emancipation that it provides. Money should be saved more through life insurance as it surely gives more in returns and more importantly, secures future.

(3) Post office: Post office savings is also a good scheme. We get an interest of 4% annually on our savings deposits.

(4) Government schemes: Many government schemes like the Public Provident Funds (PPF), the National Savings Certificate etc are yet another savings option which are good in their own respects.

(5) Mutual funds: Mutual funds could also be considered for diversification, but as it has risks, it is recommended to save less amount of money through it. Systematic Investment Plan (SIP) is good for savings. SIP through mutual fund is less risky and is also convenient for most people.

How Much to Diversify.

Savings are limited for most people because, usually, it is the leftover money after expenditures. Scope for diversification diminishes when saving is less. Some amount of money has to be saved for diversification. A minimum savings of Rupees Fifty Thousand is needed to start diversifying.

Here are three examples to show how savings of Rs. 50,000/- could be diversified.

EXAMPLE 1: When a person is young and is in the working age group (21 to 55 years of age), a good way to diversify Rs. 50,000/- would be as follows:

• 60% in life insurance. That is 60% of total annual savings could be through life insurance.
• 10% could be saved through Mutual fund's SIP.
• 10% could be saved through Post office savings plans or any other plans run by the government.
• The remaining 10% could be allowed to remain in savings bank account.

So, the bifurcation would be: Total savings = 50,000/-.

1. Life Insurance = 30,000/- (60% of total savings).
2. Mutual Funds = 5,000/- (10% of total savings).
3. Post Office / Govt. Schemes = 5,000/- (10% of total savings).
4. SB Account = 5,000/- (10% of total savings).

EXAMPLE 2: When a person is between 56 to 65 years of age (working but is nearing retirement), then Rs. 50,000/- could be diversified in the following manner:

• 70% in life insurance.
• 10% could be saved through fixed deposits.
• 10% in Post Office.
• 10% in SB Account.

So, in this case, the bifurcation would be: Total savings = 50,000/-.

1. Life Insurance = 35,000/- (70% of total savings).
2. Fixed Deposits = 5,000/- (10% of total savings).
3. Post Office = 5,000/- (10% of total savings).
4. SB Account = 5,000/- (10% of total savings).

EXAMPLE 3: When a person is above 65 years of age (is retired), then his savings, assuming to be Rs. 50,000/- only, could be diversified in the following manner:

• 70% in fixed deposits.
• 15% in Post Office.
• 15% in SB Account.

Here, the bifurcation would be: Total savings = 50,000/-.

1. Fixed Deposits = 35,000/- (70% of total savings).
2. Post Office = 7,500/- (15% of total savings).
3. SB Account = 7,500/- (15% of total savings).

These examples are just depictions of a low profile savings diversification plan. These are not the only ways for diversification, but could be considered by them who have not yet started. There are no hard and fast rules to follow for diversification as it is a matter of an individual's choice.

Tips for Diversification.

The following points may help in diversifying savings.

(1) Start from a basic account. For all needs, a bank's savings account forms the basic one. It is the most important account because it establishes the identity of an individual as an account holder and allows transactions with other banking and financial entities. A savings bank account helps in operating other accounts and often forms the first step in diversification.

(2) When we start saving in SB account, the interest we get is not enough which is why it is advisable to create a fixed deposit account and transfer some amount to it as the interest is higher in it. While doing so, care must be taken not to drain the SB account too much. It should maintain at least the minimum required balance.

(3) Although a fixed deposit account offers a higher rate of interest, it too has some limitations. A fixed deposit account cannot provide any benefits other than the slightly higher interest on the principal amount. An FD may not seem useful if the deposited amount is less.

(4) To overcome limitations in FD, life insurance can be considered as the best alternative. Life insurance is the best way to save and its benefits are always more than other savings products.

(5) Think about recurring deposit (RD) when you don't have enough money to begin a fixed deposit or to buy a life insurance policy. A recurring deposit helps in building funds for FD or for the premiums in life insurance. For e.g., lets assume that a life insurance premium is rupees 30,000/- annually. This fund could be generated by opening RD for a period of 12 months. Rupees 30,000/- could be divided by 12 to get 2,500 which will be the RD instalment.

(6) Surplus funds could be saved through SIP in mutual funds, but it is not advisable to put more than 10% of your total savings in it.

(7) Bifurcate your total annual savings into appropriate proportions and channelise them into those avenues which meets your requirements of savings the best.

(8) Do not over diversify your savings. Too much diversification leads to confusion. It won't help in maintaining proper savings. It is difficult to manage.

(9) Maintain proper records of all your savings. Check the records periodically to know how much the savings have improved. If it has not improved, take steps to make it right.

Every financial avenue has something to offer. When an individual explores these avenues, he understands the comparative difference between all of them. This improves his insights and helps him plan his financial future. Learning about different avenues of savings and investments helps an individual to take decisions more effectively and wisely.

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See post with the label "Savings".

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