Neo-banks or digital banks offer basic online banking services and a higher rate of return, unlike mutual funds which offer indexing benefits and better returns when interest rates start to rise.

Neo-banks in India operate on a partnership model with traditional banks, which means that customer funds are deposited in an underlying bank account.

For savings accounts or current accounts in a traditional bank, the Reserve Bank of India guarantees an amount of up to Rs 5 lakh through the Deposit Insurance and Credit Guarantee Corp. The same rule applies to Neo bank accounts, since the underlying account is provided by a traditional bank.

Currently, neo-banks offer a 7% yield, which is higher than the yield of some fixed income mutual funds.

Neo-banks are mainly used by new-age millennials to save small amounts of money, Juzer Gabajiwala, director of Ventura Securities, told BloombergQuint’s Niraj Shah. He expects very few investors to have placed funds worth Rs 5 lakh in Neo Banks because “…in the back of their minds, it’s still not a bank.”

In a volatile interest rate scenario, neo-banks may not be the best bet, said Harshad Chetanwala, co-founder of MyWealthGrowth.com.

When interest rates start to rise, fixed income fund categories like corporate bonds, banks and PSUs and dynamic bond funds can generate better returns than the interest offered by neo-banks, a said Chetanwala.

“As the interest rate scenario changes, there are better alternatives that mutual funds can offer – with more stability and a better way to manage money, because you have a fund manager looking global debt.

Mutual fund investors — who invest for more than three years — also benefit from indexing, Gabajiwala said.

Are low volatility factor funds a good bet?

Financial advisers recommend funds with a low volatility factor. These schemes are a mix of passive and active investments, where the less volatile companies in the index become part of the portfolio.

According to Chetanwala, investors looking for relatively stable companies with low volatility can consider these funds.

While these funds can perform well during a market correction or consolidation and provide better downside protection, returns can be subdued and lower than those of diversified equity funds if stock markets recover, he said. -he declares.

An investor comes to the stock market to realize returns, and if he “can’t digest the volatility”, stocks may not be the right option for him, Gabajiwala said.