When it comes to parking surplus funds, traditional passbook savings accounts have long been the go-to option due to their convenience in depositing and withdrawing money at will, resulting in their widespread popularity. However, with the average rate of inflation steadily declining in recent years, investors who have relied on bank deposits may face concerns regarding diminishing returns. The interest earned on these accounts will likely continue to decline in the future, with current rates ranging from 3% to 5%. As a result, exploring alternative options to savings accounts becomes imperative. In this blog, we will explore the best options available as alternatives to a savings account.

7 Best Alternatives To A Savings Account

1. Money Market Accounts

A money market account shares similarities with a savings account, but it offers distinct advantages for investors. The interest rate on a money market account is determined by prevailing market conditions, and it typically exceeds that of a regular savings account. However, certain criteria must be met, such as maintaining a minimum balance and limiting monthly withdrawals. Account holders also have the convenience of writing cheques from their money market account, even though there are a limited number of cheques allowed per month. 

It is important to note the requirements for the minimum opening deposit and minimum balance, as some financial institutions may impose penalties or reduce the account's interest rate for non-compliance. Before considering an investment, ensure you are well informed about the specific details and terms of the money market account.

2. High Yield Online Bank Savings Account

Online savings accounts offer a digital alternative to traditional savings accounts, providing customers with remote access to their funds without the need for in-person interactions. All transactions and interactions are conducted virtually, necessitating customers to be comfortable with technology and electronic devices such as mobile phones or computers. These are high-interest rates savings accounts, although they are subject to fluctuations over time.

3. Certificates of Deposit (CDs)

A certificate of deposit (CD) operates similarly to bank fixed deposits but offers higher interest rates. Like fixed deposits and CDs have a fixed tenure, making the funds inaccessible to investors for the entire duration. This investment option is most suitable for individuals who can afford to keep their savings untouched for an extended period. The interest earned on CDs increases with longer lock-in periods, and premature withdrawals are typically not allowed, resulting in penalties if accessed early. However, CDs offer flexibility in utilizing surplus funds, and they accept investments with large denominations.

4. Liquid Funds 

Liquid funds are an attractive choice for low-risk investments, offering open-ended schemes with short-term maturity. With a focus on maintaining capital protection, these funds provide an opportunity for investors to generate annual interest rates ranging from 7% to 8%. The added benefit is the ease and speed of accessing deposits, as investors can make withdrawals within a day. Despite the flexibility of withdrawals, the interest earned remains comparable to that of fixed deposits, making liquid funds a favorable option for investors seeking liquidity and steady returns.

5. Ultra-Short-Term Funds

Ultra-Short-term funds, with a tenure of less than a year, offer a low-risk investment option that generates better returns than a savings account. Investors can conveniently park their funds for a few weeks to several months without any lock-in period, making them an excellent alternative to traditional savings accounts. Withdrawals are possible as long as the funds maintain a sufficient balance, providing flexibility and liquidity to investors seeking a safe yet rewarding investment avenue.

6. Government Bonds

Government bonds are widely regarded as the safest investment option for individuals seeking to allocate their surplus funds. In India, these bonds are an initiative of the Reserve Bank of India (RBI) and can be acquired through auctions or non-competitive bidding facilities. Investors have the choice to purchase government bonds either through mutual funds or directly from the government, providing them with accessible avenues to engage in this secure investment opportunity.

7. Public Sector Unit (PSU) Debt Mutual Fund

Debt mutual funds are considered long-term investments with a lock-in period of at least 3 years. Banking and PSU funds fall under the category of mutual funds, with a significant portion of their funds invested in bonds, certificates of deposits, and debentures. These funds offer high liquidity, low risk, and better returns to investors. Moreover, the active involvement of the government in these funds ensures the repayment guarantee, further enhancing their appeal as a reliable investment option.

Final Thoughts

There are plenty of alternatives to a traditional savings account. Depending on your financial goals and risk tolerance, you may find that one or more of these options suit you better than a savings account ever could. Whether it's a high-interest savings accounts, a checking deposit, or investing in the stock market, taking the time to explore your options can pay off big-time in the long run. So don't be afraid to break away from the norm and try something new – your wallet (and future self) will thank you for it!