Cut out the bank and double your money in half the time

The bank is an intermediary, a  financial "dalal" - though it is only of the many roles it plays in our daily lives.

The heading may sound sensationary.. but it is meant to be because it is one of the ways the bank makes very significant amount of money.. by using your money and lending to others.. " ek haath lo.. doosra haath do" phenomena.

There are functions of a bank that cannot be replaced and cannot be disrupted and we should continue to use them

Let me explain..

When banks lend to individual and businesses they do so nowadays at what rate.. almost 11% interest per annum .

And when banks pay you for your fixed deposit or for your savings account money,  They pay you at 6% and 3.5% respectively.

So for every Rupee you deposit with them they can convert it to an income of almost 2 to 3 X of potential profit for themselves... it's a fantastic way to make money !

Of course there are also costs of doing business, real estate, employees, technology and potential of default which reduces their net interest margins to the mid 20% range.

But what the above tells you is that the best business ( apart from being the government who can tax you at unreasonable levels .. imagine a 18% tax on eating out!) Is that of being a bank.

So.. what kind of options are there to avoid paying all of these differential costs if you are a person with a better financial credit score and practices.  Below are some ways which I have been reading about .. some which i do.. and some which i need to read and execute to understand better..

1. Invest directly into mutual funds.. liquid and debt

There are multiple debt funds which give you 7-9% risk based returns ( this is different from the fd where it is guaranteed. As one goes higher up the return list, the risk gets transferred to you.. this is very important to understand ). But the risk is not very large and can be borne by the investors.

Here is a link which talks about different debt funds ( initial part of the video) which very nicely explains this . ( it's a video from cnbc awaaz)

There are some good ways one can invest in liquid funds and also in debt funds .. as good as safety in the bank and as good as money that can be quickly accessed as required.

2. Peer to peer lending

Now banks do what. They lend to individual and businesses. At high rates.  So if any website or business can bring the investor and the entity requiring funds together .. it's a great opportunity to cut the intermediatary out and get higher returns.

These are done by peer to peer lending websites.  They can give you 8-12% returns. One of course has to do a lot of due diligence to ensure you are lending to the right company and have a good chance of recovering your money back. ( remember while the banks make upto 2-3 X of revenue their NIM  is only 20-30%).

So if you can ensure that you do the right due diligence you can make good returns.

So.. in short one can using the above two ideas double your interest returns vs what one makes in keeping money in FD and savings accounts.

What this means for you ? Your money will become double in half the time it was being doubled earlier.. or four times in the time it was being doubled earlier.. or 16times in the time it would take to become 8 times

It's powerful concept... one that requires you to be smart and driving methods to do this..

It's simplefinancialsense

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