Sweeper Savings Accounts- Best of two worlds!
The current economic scenario has made people risk averse and stay away from risky investment instruments which is why most of their un-invested funds are lying idle in the saving bank account earning a low interest rate. Most of us like to maintain a healthy cash balance in our saving account to enjoy liquidity. This is more or less for contingency as an unexpected expense can hit us anytime. But to get high liquidity at the cost of loss of high interest rate is not a good option. However in the last few years, banks are providing the facility which can make you earn an interest rate as good as a fixed deposit
with liquidity of saving bank account without having separate Fixed deposit and savings bank a/c. This type of an account is called a Sweep-in account or Flexi-Deposit account.
How does a Sweep Account function?
A sweep account offers combined benefit of both saving account and fixed deposit accounts. The bank interlinks customers saving account with fixed deposit account and facilitates transfer of extra amount above the limit predefined by the customer from saving account to fixed deposit account to make you earn high rate of returns.
The customer needs to decide the amount he is willing to keep in his savings account. This is called the threshold limit, and money up to that limit will be in the form of cash in your savings account providing easy liquidity. This amount can be your 3-6 months expenses or an amount you think you may require in a short period of time or can be contingency fund etc. Any amount above the threshold limit will automatically be converted into a Fixed Deposit and will start earning returns as per the Fixed Deposit interest rate. At any point in time, if you require money more than the amount lying in your savings bank account, the money lying in the Fixed Deposits is Reversed-sweeped into your savings account and you can withdraw the amount you require. Generally when one breaks their Fixed Deposit before the completion of the tenure a penalty is charged however in a sweep account the breaking of the Fixed Deposit has no penalty. One may not be aware about the breaking of the FD till the statements are checked.
Different banks have different names for this facility. For example, ICICI Bank calls it ”Auto Sweep” , HDFC Bank calls it “Sweep-In” account , SBI calls it “Saving Plus” etc. The interest rate earned in a sweep account depends from bank to bank. The interest rate offered on these auto sweep FDs is the same as the rate offered on regular FDs of that duration. This means that you earn returns in the range of 8-9% on the amount above the threshold limit compared to the rate of a savings bank a/c which is in the range of 3-4%.
Why is it essential to have a sweep account?
A sweep account work wonders for a salaried person as they get their monthly salary on their savings bank account. Since most professionals are busy and risk averse incase of investments, they leave their un-utilized salary idle for months in their savings bank account. Thus this facility will benefit a lot to earn higher interest rates and simultaneously maintain liquidity. However if you are very sure that the money lying in your account will really not be used for long then it is better to use the normal Fixed deposit or any other investment instrument depending on the tenure of your future financial goals.
Sweep account allows you to maximize your idle cash balances in case of a business by earning a high interest rate and high liquidity. Thus for a business man a sweep account is a better option than taking an overdraft on a Fixed Deposit. In case of an overdraft there is a minimum amount stipulation which may be more than the money you need however if you are holding a Sweep account you can withdraw the exact amount that you need. At the same time, you don’t need to pay the additional fee and charges that an overdraft entails.
When you opt to open a sweep accounts you must carefully analyze your financial requirements. Sweep accounts may be a way to offset other economic challenges with additional earnings and offering the convenience of automatic daily investments and high liquidity.
By Namrata Shah.
The writer is working with FpGuru.com as a Financial planner.
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