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Most of us postpone investing our cash inflows in productive investment opportunities. The extra cash lies idle in your bank account, earning a meager Savings Bank (SB) interest, just because you may be too busy to invest it or do not give much thought to it. This is where an Auto-Sweep facility in your Savings Bank account will help you.
Meaning of Auto-Sweep Facility
“Auto Sweep” facility is offered by many leading banks and is called by different names in different banks. This gives the twin advantages of both a Savings Bank account and a fixed deposit (FD) account. Your Savings Bank account is linked to a FD, and any amount lying in the Savings Bank account above a pre-defined threshold limit is automatically transferred to the FD account, helping you earn higher interest compared to the interest earned in Savings Bank account.
Working of an Auto-Sweep Account:
In an Auto-Sweep account, you define the maximum amount you would want to hold in your Savings Bank account, which is the threshold limit. At any point in time, when your account has a balance higher than this limit, the surplus is transferred to a FD account automatically, enabled by technology. This is called a “sweep-in” and the transferred amount earns normal FD interest. The amount in the Savings Bank account earns Savings Bank interest. Whenever you need money in excess of the pre-defined limit, the money in your FD is swept back into your Savings Bank account, which is called “sweep-out” or “reverse-sweep”.
Suppose you open an Auto-Sweep Savings Bank account in ABC Bank with -
Minimum balance: Rs.5,000
Initial deposit: Rs.30,000
Threshold limit defined: Rs.10,000.
The excess Rs.20,000 is transferred automatically by the bank to a new FD account. This will earn FD rate of interest. The amount in your Savings Bank account (Rs.10,000) will earn Savings Bank rate of interest. If you wish to withdraw Rs.15,000 after 3 months from your Savings Bank account, the shortfall amount of Rs.10,000 (withdrawal amount of Rs.15,000+ minimum balance of Rs.5,000- threshold limit of Rs.10,000) will be auto-reversed from your FD account. If it is a zero balance account, only Rs.5,000 will be reversed from the FD. Your FD which is now reduced to Rs.10,000, will continue to earn FD interest. In future, if you deposit more money into your account, the excess above the threshold limit will again be swept into a FD.
Advantages and Drawbacks:
This facility offers the double benefits of liquidity and flexibility of a Savings Bank account and high interest rates of a FD account. It is suitable if you are not able to exactly time the need for money. This facility is especially useful for the salaried class, who may not be willing to lock-in large amount in FD, but at the same time want to earn high interest on idle money in the Savings Bank account.
While there are certain benefits of the Auto-Sweep facility, it is not bereft of drawbacks. You may not be able to efficiently track the movement of your funds if you are too frequent in your sweeps. Additionally, some banks may specify a minimum period for FDs. If there is a pre-mature withdrawal when you need money, it will attract a penalty on the interest rate offered. Some banks also calculate simple interest on FDs created under this facility, as against compound interest in traditional FDs. Although this facility is generally free of charge, some banks apply service charges on transactions.
Should you opt for the Auto-Sweep facility?
Auto-Sweep is best suited for busy professionals who do not have time to monitor their Savings Bank account, helping them earn higher interest on idle cash. It is also suited for people having only few transactions in their Savings Bank account. However, it is important not to over-do this facility. If you think you can predict your cash flow patterns reasonably well, it is better to invest the surplus cash in better-manageable investment avenues with no penalty for fore-closure.
While it is a good idea to leverage the excess cash and earn better interest, please keep in mind that such short term FDs are tax inefficient. Also, interest earned on FD is subject to TDS by Bank if the amount exceeds Rs. 10,000.
If you like to avoid Auto-Sweeps, one good option is to look at Yes Bank Savings Account. This will earn you interest @ 7% p.a. for balances above Rs. 1 Lakh.
Another important aspect to keep in mind is that your surplus cash may have a better use for your Financial Goals like Retirement, Children’s Education etc.
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