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Many still keep a large portion of their money in savings accounts. But with the sharp drop in interest rates recently, that may not be the best idea anymore.

Following the in key policy rates this year, leading banks have slashed their savings account interest rates.

The State Bank of India (SBI), for example, now offers just 2.5% per year on savings accounts. This is one of the lowest in recent years and makes savings accounts less attractive for people who want to grow their money safely.

Private banks like HDFC Bank, ICICI Bank, and Axis Bank are also offering similar interest rates of 2.75% per year, while only a few small banks like IDFC First Bank are offering higher rates, up to 7%, but that too, only on very large balances.

In most cases, people are earning less than 3% on their savings.

WHAT THIS MEANS FOR SAVERS

It means that money lying idle in a savings account is losing value, especially when the inflation rate is higher than the interest you earn. In simple terms, the money in your savings account may not be able to buy the same goods and services a year from now.

"Following RBI's aggressive 100 basis points rate cut in 2025, SBI has reduced savings account pre-tax returns to around 2.70%, making it unattractive to park large amounts in savings accounts when other debt instruments are offering comparatively better returns with similar liquidity," said Abhishek Kumar, Sebi-registered investment adviser and founder of SahajMoney.

He explained that while savings accounts are important, they should only be used for day-to-day financial needs. "One should continue to use savings account for operational use such as paying bills and managing monthly expenses," he said.

Abhishek added that the key is to keep a balance. "Keep around 1 to 2 months of expenses in savings account and based on one's risk appetite invest the rest in other debt instruments such as debt mutual funds, FDs, etc."

ALTERNATIVES THAT MAKE MONEY WORK

According to him, other instruments are better suited for those who want to grow their money. "These alternative debt instruments are better suited for short-term or long-term duration as they offer better returns with similar level of liquidity," he said.

He also pointed out that though both FDs and debt mutual funds are taxed at the same rate, there is an advantage with mutual funds.

"Although returns from debt mutual funds get taxed at the same level as FDs, one is required to pay tax only at redemption. Hence, debt mutual funds are a comparatively better option if one has the risk appetite for them," he said.

Pallav Bagaria, Director at Sapient Finserv, also said that savings accounts still play a key role in daily money matters. "Yes, but only for convenience, not growth. A savings account remains essential for 1. Salary credit, 2. UPI transactions, 3. Bill payments and EMIs, 4. Auto-debits, 5. Maintaining financial records."

But he warned that people must not treat savings accounts as a place for long-term parking of money. "The current interest rates as low as 2.5%-3.5%, savings accounts now yield below inflation. In simple terms, your money is losing value over time if it just sits there," he said.

"Think of your savings account as a wallet - a place to hold money you need for daily expenses, short-term needs, and emergencies. But don't confuse it with a locker to park your long-term savings. For that, you need smarter options."

WHERE SHOULD YOU PARK YOUR EXTRA MONEY?

Bagaria suggested a few options depending on one's investment goals.

"The answer depends on your investment horizon and your risk appetite as well as on your financial goal," he said.

For short-term goals (less than 1 year), he recommended "Liquid Plus and Arbitrage Funds - better returns than savings, with reasonable liquidity and low risk."

For medium-term goals (1 to 3 years), he said "Corporate FDs, Short Duration Debt Funds, or Hybrid Fund - balance of returns and safety."

And for long-term goals (more than 3 years), he said "Equity or Equity-Oriented Products/ Hybrid Products - potential for wealth generation."

"Every rupee that sits in a low-yield account is a rupee not working for you. And in a world of rising expenses and evolving markets, that's not a luxury most can afford," Bagaria said. "Understand your goals, define your liquidity threshold, and channel everything beyond that into more efficient instruments that can help you protect and grow your wealth over time."

While savings accounts are still important for regular financial tasks, experts believe they are not suitable for long-term saving or growing wealth. For that, you need to plan better, understand your needs, and choose better options to make your money work for you