What is a Sweep Account?
This is an innovative deposit option that allows you the convenience of a bank account without compromising on the interest that your money earns compared with a long-term investment vehicle like a Fixed Deposit (FD). Most leading banks in the country, including public sector banks, offer this facility, but the name may vary.
The auto-sweep facility is a combination of savings account and FD or fixed deposit account. It carries with it the advantage of both facilities. With an auto-sweep account, your savings account is linked to a fixed-deposit account and a monetary limit is defined. Whenever the amount in the savings account crosses that defined limit, the excess money is transferred automatically into the fixed deposit. This way, your savings account balance can earn a higher rate of interest than it would have lying in a plain-vanilla savings account.
How does it work?
While some banks require you to open a bank account, which is then linked to an FD account, others reverse the process and offer a sweep facility in lieu of overdrafts. In case of the latter, as soon as you open an FD, you gain access to a savings or a current account which, more often than not, has no minimum balance requirement. Should the balance in your account be insufficient to meet the requirement of a debit instruction received by the bank, funds from your FD will be automatically swept into your account in predetermined blocks that vary from Re 1 to Rs 1,000, depending on the bank. At the same time, you only lose interest on the block withdrawn.
On the other hand, Syndicate Bank and Bank of Baroda, among others, ask you to open a savings account first. On any day, if your account holds more money than is required as per the minimum balance criterion, the excess funds are automatically swept to the linked FD in predetermined units, ranging from Rs 1,000 to Rs 5,000.
Advantage of Sweep Account
For current account-holders, especially small businesses, a sweep account is a better option than taking an overdraft on an FD. Not only can you withdraw the exact amount that you need in case of an overdraft, there is a minimum amount stipulation which may be far more than the money you need but you can make up for the interest you lose by making further deposits in the FD account. At the same time, you don’t need to pay the additional fee and charges that an overdraft entails.
This facility also works better than a regular savings account. The money parked in the latter earns just 3.5% interest, but in a sweep account, the excess money swept into the FD account will earn at least double the interest. Better still, most banks allow you to link multiple FDs to your account. ICICI Bank has recently introduced a pure online account called B2 linked with this facility.
Eligibility Criteria
You either have to open a premium account, where the minimum average monthly/quarterly balance is between Rs 25,000 and Rs 1 lakh, or take an FD of at least Rs 25,000.
Who stands to gain the most from this facility?
If you are sitting on idle cash reserves say, you are looking for investment options a few months down the line a sweep account can help you manage money more efficiently.
Factors to keep in mind before availing of this facility
Threshold Limit: Some banks have a fixed threshold limit of anywhere between Rs.25, 000 and Rs.1 lakh while few may give you the option to set your own limit. A lower threshold limit helps in generating high return on one’s savings. In addition to the threshold limit, also consider the mandatory minimum limit in the account. Most banks ask for a minimum average balance MAB) ranging from Rs 1,000 to Rs 10,000 to be maintained in the savings bank account. All auto-sweep accounts have a certain threshold limit. This will be well above the MAB of the account.
Tenure of the FD: Though you the option to fix the tenure of the FD, few banks may only give you one with a fixed tenure. Auto-sweep accounts have a fixed tenure which is usually for one year. Some banks may charge a penalty for breaking the FD before the term. The premature withdrawal penalty is usually around 0.5-1 per cent of the interest payable. The good thing is one may have more than one FD, therefore, it is better to diversify across tenures to minimise the interest rate risk.
Minimum Tenure: Look at the minimum tenure before the sweep-in facility kicks in. If you don’t keep the money for at least 30 days, most banks will offer a much lower interest on the FD. This means that it is only beneficial for you to go for an FD if your tenure is longer than 30 days. Otherwise you are better off with a savings account.
Interest Rate: The interest rate on offer could be similar to what is offered on a regular FD but in a sweep-in FD, some banks may not offer additional interest rate to senior citizens.
Multiples: The withdrawals from the FD can be made in different multiples. Some banks set Re 1, while others may keep it at Rs 1,000 or Rs 5,000. Lower the multiple, the higher is your savings.
Withdrawals: See if the bank allows withdrawals through all modes such as cheque, ATM, and at the bank branch. But, keep a tab on such withdrawals. If you make withdrawals frequently from the FD, you will lose out on interest, no matter how much you put into the account. This is because the interest is calculated taking into account the number of days the FD was with the bank. Thus, if the FD tenor was for a year, but you withdrew a sum within 45 days, then the interest applica will only be for 45 days.
Manner of Withdrawals: The manner in which the funds will move between the savings account and the FD is also an important factor to consider. They can be either on ‘Last in First Out (Lifo) or on ‘First in First Out (Fifo) basis. In general the Lifo method will earn better because the first FD sweep earns interest for a longer period, but if you make frequent withdrawals, Fifo method might better.
Taxation
Do not ignore the taxation aspect. The interest earned in a savings account under section 80 TTA, is tax-exempt up to Rs 10,000 a year. However, the interest earned in a FD is taxable as per one’s income slab. Therefore, sweep-in will suit those in the lower tax bracket than someone paying 30.9 per cent tax.
Who should use it?
Such FD schemes suit those who have large balance in their savings account and can only withdraw a limited number of times. Sweep accounts are typically useful if you have money at the end of the month left over after your expenses. That is, you have a large bank balance at the end of the month and you hardly make any withdrawals from the FD. If this is the case, then auto sweep will earn better returns.
How Sweep-in Accounts can make you more Money than Bank Savings Account
How they differ
Two important things you need to keep an eye on while opening sweep-in account with banks are – minimum average balance and the threshold limit. “Different banks have different structures for their auto-sweep facility. For instance, one bank may set the minimum average balance (MAB) as Rs.25,000, while another may set it at Rs.50,000. Yet another bank may allow you to set the minimum average balance beyond which the money in your SB account would be moved to an FD. The threshold limit of the FD may also be fixed by the bank,” says Shetty.
Not all of these may work out for you for various reasons. For instance, a bank may fix the MAB at Rs.40, 000 and the FD threshold at Rs.10,000. So, if you have Rs.100,000 in your SB account, the Rs.60,000 will be automatically moved into 6 FDs of Rs.10,000 each. When you withdraw cash, the funds in the savings account are used. In case you have insufficient funds in your savings account, the deficit will be made good by withdrawals from your FD,” informs Shetty.
Watchouts
Sweep-in accounts may not work to a bigger advantage in all cases. If you make withdrawals frequently from the FD, you will lose out on interest, no matter how much you put into the account. This is because the interest is calculated taking into account the number of days the FD was with the bank. Thus if the FD tenor was for a year, but you withdrew a sum within 45 days, then the interest applicable will only be for 45 days.
Also, if you don’t keep the money for at least 30 days, most banks will offer a much lower interest on the FDs. This means that it is only beneficial for you to go for an FD if your tenor is longer than 30 days. Otherwise, you are better off with a savings account.