Savings account is one of the most commonly known types of bank account. More than 17m Pakistanis have one. And yet the savings account may well be one of the most useless types of account available in the country.

Think about what a savings account is: it is supposed to be the vehicle a person uses to accumulate their short and medium-term savings with the hope of a healthy rate of return as well. Yet the overwhelming majority of savings accounts earn less than a 6pc interest rate at a time when inflation is closer to 8.5pc per year. Why on earth would anyone put their money in an account that promises to cause you a loss in inflation-adjusted terms?

I understand why the banks offer savings accounts: it is a cheap way for them to raise money that they can then lend out (mostly to the government) at higher interest rates. Borrowing money from a depositor at 6pc and lending it out to the government sounds like a pretty easy way to make money. That probably explains why one of the biggest factors in bankers’ compensation is the number of current and savings accounts they are able to get customers to open as well as the amounts in those accounts.

But the millions of people who walk into banks every day and deposit money into savings accounts really ought to learn about the many better options that now exist. It was understandable for them to have savings accounts before the late 1990s, when there were hardly any asset management companies in the country and fixed income and money market funds did not exist. But they do today, and people should seriously consider them as options for their savings needs.

Evaluate other options if you really want to save your hard-earned money

Let’s revisit why a savings account should be used in the first place: a savings account is where you put money that you will not need over the next month but will need within the next two to three years. Any money you need sooner than that needs to go into a current account for more ready access. Any money you need for later than that should go into a fixed income fund, which invests in medium and long-term bonds, or even a stock market fund if you want to save for longer than 10 years.

A savings account would be justifiable for the intermediate term. Suppose you are saving up to buy a car and know that it will take you two to three years to get enough money to buy one. Or maybe you want to make a down payment on a new apartment and need to save money for it. Savings accounts would be appropriate for such uses, were it not for the existence of a better alternative.

Money market funds are also mutual funds, but unlike regular mutual funds, are designed to give you faster access to your money. A stock fund or a fixed income fund typically takes two to three business days to give you your money back from the time that you first request it, and can sometimes take up to six days. Money market funds, however, typically clear your money to you by the next business day, making them ideal for shorter durations.

What makes them better than savings accounts is the fact that they earn a significantly higher rate of return. And for those so inclined, Sharia-compliant options are available from virtually every asset management company in the country. Rates of 9-10pc are more common among these funds. They do not usually beat inflation by much, but they are better able to keep pace with it.

I should warn you that money market mutual funds are somewhat riskier than conventional bank accounts. During the financial crisis of 2008, when both the stock and bond markets collapsed, it was discovered that many money market funds had invested in highly risky bonds that they were not able to sell. As a result, many such funds refused to honour redemption requests, at times for months on end.

Admittedly, the asset management industry and the Securities and Exchanges Commission of Pakistan (SECP)have come a long way since then. There is a much clearer demarcation of high-risk and low-isk funds and the SECP is more diligent about enforcing the laws as they are written. But they do remain a higher risk than a typical bank account.

Then again, as I have said earlier, nothing is without risk. We often assume that bank accounts are without risk. Yet the truth is that there is no such thing as deposit insurance in Pakistan. Unlike the US and Europe, bank accounts are not guaranteed by the government. If something were to go wrong at a major bank, the State Bank of Pakistan would probably step in to help fix the problem. But under the current law, it does not have to. So if you are taking on that bit of risk, you might as well get a little extra return for it.

Published in Dawn, Sunday Magazine, July 13th, 2014