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Benefits of Auto Sweep in Savings Account

Accumulating money in your savings account is one of the safest options around since your capital is secure and banks also give you interest ranging from 4-7% on the capital parked in the account. However, by doing this, you lose out on the extra interest that you might earn if you had invested the excess capital in fixed deposits.

To help savings account holders capitalize on the higher interests that fixed deposits earn, banks provide the auto-sweep facility that offer the benefits of a fixed deposit within your savings account. This facility is named differently for different banks. For instance, Axis Bank offers this facility as Encash 24 flexi deposit.

How does auto sweep facility work?

In the auto sweep facility, you need to determine the threshold limit that you want to retain in your account at all times. Do note that this amount is different from the minimum balance that banks define for a savings account. The excess amount over the threshold limit is sent to a fixed deposit so as to earn higher interest. In the meantime, the amount within the threshold limit continues to earn savings account interest. And if you make any withdrawal that disrupts the minimum account balance, the necessary amount of capital will be sent back to your savings account.

The process of capital being sent from your savings account to the fixed deposit is known as “sweep in” and the return of capital from fixed deposit to your savings account is known as “sweep out”. Here’s an example for better understanding.

Total deposited amount = Rs. 60,000/-

Minimum balance = Rs. 5,000/-

Threshold limit = Rs. 20,000/-

Excess amount = Total deposit – Threshold limit = 60,000 – 20,000 = Rs. 40,000/-

Interest on Fixed Deposit = 8%

Interest on Savings account = 4%

Here, the excess amount of Rs. 40,000/- gets swept into the fixed deposit and earns 8% while the remaining Rs. 20,000/- within the savings account continues to earn 4% interest. Now let’s look at what will happen in different scenarios –


Scenario 1

There is another deposit of Rs. 10,000/-. Again, this excess amount gets swept into a 2nd fixed deposit. 

Scenario 2

A third deposit of Rs. 15,000/- is made. This becomes the 3rd fixed deposit using the auto sweep facility. So now, the threshold limit in the account stays at Rs. 20,000/- with three fixed deposits worth Rs, 40,000/-, Rs. 10,000/- and Rs. 15,000/- respectively.

Scenario 3

A withdrawal of Rs. 25,000/- takes place and the minimum balance that needs to be maintained in the account is Rs. 5,000/-. So Rs. 15,000/- will come from the savings account while Rs. 10,000/- will be swept out (auto reversed) from the fixed deposit to the savings account. The remaining amount will continue to earn FD interest.

*The bank might break the fixed deposit either LIFO (Last in first out) or FIFO (First in first out).

 Scenario 4

A deposit of Rs. 20,000/- is made. Here, Rs. 15,000/- will be utilized to replenish the threshold limit back to Rs. 20,000/- and the remaining Rs. 5,000/- will be swept in towards another fixed deposit. As you can see, every time any excess amount beyond the threshold limit comes into the savings account, it is swept in towards a new fixed deposit. And if a previous transaction has upset the chosen threshold limit, then part of the next deposit will replenish the threshold limit and the excess will go towards the fixed deposit.

 

What to consider when going for an auto-sweep facility

  • Check the tenure the bank is offering on auto-sweep facility. Some banks offer maturity periods of 1 year 1 day while others offer flexible maturity periods subject to the deposit amount.
  • Banks might liquidate the fixed deposit using the LIFO (Last in first out) or the FIFO (First in first out) mode. If your first FD is of a high amount and gets liquidated using FIFO, you may lose out on the higher interest you were earning. Similarly, if your latest FD is of the highest amount and gets liquidated LIFO, you lose the opportunity of earning high interest for the amount you initially parked. Select the mode that suits you best.
  • The auto sweep facility is a good option if you do not make too many transactions i.e. withdrawals for your account or cannot decide where to invest as this facility helps you get growth on your accumulated capital. But if you do, then you would not gain much from this facility as your FDs might be constantly liquidated. Some banks might even charge penalties for premature sweep out or reversal of funds if the maturity period is fixed.

 

 

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