If you have a bank account and you keep your surplus funds in your savings account, then this article is for you. Generally, a savings bank account offers the flexibility of any time deposit and withdrawal as per your convenience and you can earn interest on it. The facility of anytime deposit and anytime withdrawal is only provided by savings accounts or current accounts, not by any other financial products.
However, the rate of interest on savings bank accounts is very low i.e. 2% to 3.5%. Therefore, it is not wise to keep a lot of money idle in your savings bank account only for this convenience. In this situation, auto sweep comes out as the best alternative solution for all of us.
Once you activate the auto-sweep in your savings bank account, the amount lying above the threshold limit in your savings account will automatically be transferred to the fixed account and earn more interest income than the savings account.
In this article, we will understand the concept of the Auto Sweep Facility, how it works, its benefits etc.
What is an Auto Sweep Facility?
An auto sweep facility is a banking facility that integrates your savings bank account and fixed deposit account. It allows your surplus funds kept in your savings bank account to be automatically transferred to the fixed deposit account, thereby earning a higher interest rate.
Here, the surplus funds in your savings bank account that are over the threshold limit are converted into a fixed deposit which can be withdrawn anytime at your convenience.
When the balance in your savings account falls below the minimum limit due to withdrawals or payments made, the required amount is automatically transferred from your fixed deposit account to your savings account. This way, you earn an additional return on your money while getting the benefit of any time withdrawal.
How does the Auto Sweep Facility work?
First of all, you need to specify the threshold limit on your savings bank account. Suppose you specify the threshold limit of Rs 30,000/-. If the balance in your savings account exceeds the threshold limit i.e. Rs 30,000/- the excess amount will automatically transfer to your fixed account.
Let us understand with an example.
Suppose you have a savings bank account with a minimum balance requirement is Rs 10,000/- You decided to opt for an auto sweep facility in your savings account to get the additional interest income from your money. You selected the threshold limit of Rs 30,000/-
Now you deposited the amount of Rs 70,000/- in your savings bank account. In this case, the excess amount of Rs 40,000/- will be transferred to your fixed deposit while the remaining Rs 30,000/- will remain in your savings account. In this case, the amount lying in your fixed deposit will earn a higher interest rate as compared to the savings bank account.
Suppose you need to withdraw Rs 35,000/-. The bank will use Rs 30,000/- from your savings account and the balance of Rs 5,000/- from your fixed deposit. In this case, the balance in your savings bank account will become zero and your fixed deposit will be Rs 35,000/-
To keep the minimum balance requirement of Rs 10,000/- in your savings account, the bank will pre-mature your FD by Rs 10,000/-. Hence, you have Rs 10,000/- in your savings account and Rs 35,000/- in fixed deposit. It ensures you have sufficient funds in your savings account while earning a higher return on your surplus funds.
Difference between an Auto Sweep and a Normal Fixed Deposit?
The main difference between an auto sweep facility and a normal fixed deposit is the convenience they offer to account holders. You need to opt-in to the auto sweep facility only once and every time you have surplus funds in your savings account it will automatically get transferred to the fixed deposit. You don’t need to check your bank balance every time and your idle surplus money will start earning higher returns.
On the other hand, fixed deposits require manual intervention. You need to create a fixed deposit every time you have surplus funds. If you forget to make a fixed deposit, you will lose the additional interest income on your surplus funds.
Benefits of Auto Sweep Facility
Higher Interest Earning
Once you opt for the auto-sweep facility, your excess money gets transferred to the fixed deposit account. This helps you earn additional interest income on your surplus money deposited in your bank account.
Liquidity
The auto sweep facility provides you with the convenience of liquidity just like your savings bank account. If you need money, the bank automatically transfers your funds invested in a fixed deposit into your savings account.
Flexibility
Banks offer you to choose the tenure of a fixed deposit. The minimum amount you want to keep in your savings accounts. This helps you to earn an additional interest income without worrying about the availability of funds.
Build Wealth
When you opt for an auto sweep facility, your surplus funds start getting invested in fixed deposits without your intervention. These surplus funds grow over time and build wealth for you. Therefore, an auto sweep facility helps you to build wealth over time.
Disadvantages of Auto Sweep Facility
Penalties
Banks levy penalties on premature withdrawal of fixed deposits. This penalty varies from one bank to another. Suppose you need money and you withdraw it before the maturity date of the fixed deposit, and then the banks will levy a penalty on it. This penalty are charged in the form of lower interest rates.
Suppose a fixed deposit is opened for 6 months at a 6.75% annual interest rate through an auto sweep facility. However, if you have to withdraw the fixed deposit in 30 days prematurely then you will get the applicable interest for 30 days, which is 3.75%. Apart from this, banks will also levy penalties on premature withdrawal of fixed deposits. Suppose the bank charges a penalty of 1%, then you will get only 2.75%. This may be less than the interest rate offered by the bank on your savings account.
Account holders should be aware of this penalty and make their withdrawals accordingly.
Tenure
In the auto sweep facility, you can choose the tenure of your fixed deposit. The longer the tenure of your fixed deposit, the more interest you will earn.
Suppose you have opened a fixed deposit for 6 months; the interest rate is 6.75% per annum. However, if you choose a tenure of 1 year, the interest rate may be 7.1% per annum. This is important because you have to decide the default tenure of your auto sweep fixed deposit. If you choose a lower tenure, you will receive less interest income. However, if you choose a higher tenure, there will be a risk of premature withdrawal and penalties. Therefore, choosing your default tenure becomes very important.
Withdrawal
The main attraction of the auto sweep facility is to earn interest income on your excess funds like a fixed deposit which is higher than the interest on a savings account. Since fixed deposits have a default tenure that you or your bank choose, withdrawing before the maturity date attracts a penalty in the form of reduced interest or forfeiture of interest altogether. In such a case, you may earn less interest than what you would earn in your savings account.
If you withdraw money from your bank account frequently, it is possible that your auto sweep fixed deposit may also break down frequently and you may have to pay a penalty for every pre-mature fixed deposit.
So, you need to plan accordingly whether you need the auto sweep facility or not.
Additional Fees
Some banks charge additional fees when you avail auto sweep facility in your savings bank account. These could be maintenance charges, service charges, transaction charges etc. You need to carefully examine them because they seem too small but may have a huge impact on your earnings over a long period.
It is important to weigh these disadvantages against the benefits to determine if the auto sweep facility is right for you. Do you think these drawbacks are enough to avoid using this facility?
Who should opt for the Auto Sweep Facility?
In my opinion, everyone should opt for an auto sweep facility. If you opt for this facility, you will earn more interest income from your surplus funds.
But if you opt for the auto sweep facility, you need to keep the following points in mind
Your Financial Habit
The auto sweep facility is beneficial for those individuals who keep sufficient funds in their savings account and want to earn extra income from their funds. If you have surplus funds in your bank accounts then only the auto sweep facility is the best choice for you.
Your Withdrawals
The auto sweep facility is beneficial for those individuals, who make fewer withdrawals from their bank accounts. Individuals who make fewer withdrawals from their account can only let their money be invested in the auto sweep fixed deposit for a longer duration of time and earn high-interest income.
However, if you frequently withdraw money from your bank accounts, it will be better to keep money in your savings account.
Minimum balance requirement
Some banks have a minimum balance requirement to qualify for an auto sweep facility. You have to check whether you can meet this minimum balance requirement so that you can enjoy the benefits of the auto sweep facility.
Final Words
Auto sweep facility is the banking feature that helps bank account holders earn extra money from their surplus funds. So, instead of keeping your surplus funds in your savings account, start incorporating an auto sweep facility to grow your funds.
I hope this article helps you to understand the concept of auto sweep.
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