Are you among those people who delay investment decisions? If yes, then you have just joined the brigade of people piling their salaries in savings bank accounts owing to liquidity reasons or simply because they have not found time to select the right investment avenues.
If you have a lot of cash lying idle in your bank account and don’t want to commit to any long-term investment, then the auto sweep facility is probably your best bet, since you can at least earn something rather than keeping cash idle.
What is auto-sweep: Auto sweep is a facility that interlinks your savings account with a fixed deposit (FD) account and transfers any extra amount lying in your bank account, above a threshold limit, to your FD, thereby helping you earn better interest. When an amount is transferred from the savings account to FD, it is called a sweep out. And when it is shifted from a FD to a savings account, it is termed sweep in.
Banks use different terminologies for the auto sweep facility. Some refer it as auto sweep, flexi fixed deposit, premium savings account or also a two-in-one account.
“People should take advantage of this facility, as it would help them earn interest on idle cash. Only few banks offer this facility.
Some banks also allow their customers to set the threshold limit on their savings account, which is in line with their bank norms,” says Suresh Sadagopan, who runs Ladder 7 Financial Advisories.
How it works: One has to set a limit on his savings bank account, which will be maintained in the form of cash and any amount above this limit is automatically converted into a FD, wherein the person earns normal FD returns on it. If, at any point, the investor needs money from the bank account, he can use the reverse sweep facility, which will transfer the amount from FD into the savings account.
In case of Kotak Mahindra Bank’s Activmoney facility, the base limit is decided by the bank itself, but the customer is free to define a higher threshold. The balance amount, above the set limit, is transferred to a term deposit of 181-day tenure and in case of insufficient funds the term deposit money is transferred back into the savings account.
“Sweep out happens if the balance in the account is more than at least twice of the required average quarterly balance. In fact, we advise our customers to set a limit based on their liquidity requirement to avoid too much sweep-in and sweep-out from the account,” says Puneet Kapoor, executive vice president, Kotak Mahindra Bank.
When the customer is in need of funds more than what is lying in his savings account balance, then in such a case, a reverse sweep order will immediately be auto triggered to meet the customer’s liquidity needs. This will benefit customers with maximum returns once reverse-sweep, LIFO (last in first out) system is followed.
Some banks do charge a penalty if the FD under auto sweep account is broken before a particular duration. But the person will still have a win-win situation, as he will still end up earning more than what he could have on the savings account. “The whole idea of providing an auto sweep facility is lost if they penalise the person for not completing the duration due to insufficient funds,” says S C Kalia, executive director, Union Bank of India.
Also, one needs to do a detailed research before they enable this facility, as some banks calculate simple interest, unlike the cumulative interest on fixed deposits.
Auto sweep is ideal to park emergency funds. So if you have kept some money as a contingency fund or emergency fund in saving account, then you can use the auto sweep facility and set a threshold limit as 2-3 months of expenses, so that the remaining amount can earn decent interest.
Comments