In this article, we’re going to talk about a sweep-in facility to understand what it is, how it works, and whether it’s a feature that you can find helpful both in everyday banking and in your investing endeavours.
Understanding fixed deposit sweep-in facilities
A fixed deposit sweep-in facility links your savings account with a fixed deposit account. You set a minimum balance you wish to maintain in your savings account (the sweep threshold).
Whenever the balance falls below this threshold, excess funds are automatically “swept” into the linked FD, earning a higher interest rate. Conversely, if you need money, funds can be withdrawn from the FD back to your savings account, ensuring liquidity.
For instance, if you wish to maintain a minimum of ₹10,000 in your savings account, you can set this number as the sweep threshold.
Now, on a regular basis, as soon as your account balance exceeds ₹10,000, the excess balance above this threshold will be swept away into an FD. This way, you can maintain whatever balance you like in your account for emergencies and everyday expenses without having to let go of the better returns that FDs offer.
How does it work?
Here are the steps you need to follow to enable sweep-in with your savings and FD accounts also:
- Linking your account: The first step you have to follow is to link your savings account with your FD account. You can do this either online (on your bank’s app) or by speaking to your bank’s representative. In most cases, you will have to ensure that your savings account and FD account are with the same bank.
- Setting up the threshold: You have to define the minimum balance you want to maintain in the savings account. In the previous example above, ₹10,000 was the threshold above which money gets swept.
- Reverse sweeps (optional): Some banks offer a “reverse sweep” feature. If your savings account balance falls below a certain level, funds are automatically transferred back from the FD to maintain liquidity.
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Benefits of enabling the auto-sweep feature
Here are some fundamental benefits you can derive out of this feature as an investor:
- Earn higher interest: Fixed deposits typically offer significantly higher interest rates compared to regular savings accounts. With a sweep-in facility, your idle savings automatically earn these higher returns without any manual intervention from your end.
- Enhanced liquidity: Unlike traditional FDs, sweep-in facilities allow easy access to your funds. You can withdraw money from the FD back to your savings account as needed, making it a suitable option for emergency funds or planned expenses.
- Disciplined savings: The sweep-in facility encourages a disciplined savings approach. By automatically transferring excess funds, it helps you build your savings over time without the need for constant monitoring.
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Important things to consider
Here are some things you need to consider when signing up for this facility:
- Minimum balance requirements: Banks typically have a minimum balance requirement for your savings account linked to the sweep-in facility. Failing to maintain this balance may result in penalty charges. To avoid this, you have to make sure that your threshold sits above the minimum balance requirement. That way, the swept balance will not breach the minimum limit at all.
- FD tenure: The FD linked to the sweep-in facility may have a fixed tenure, ranging from a few months to several years. Early withdrawals from the FD might attract penalties which you will have to factor into your overall return structure.
- Interest rates: Interest rates on sweep-in FDs may be slightly lower than regular FDs due to the higher liquidity they offer.
- Sweep frequency: The frequency of automatic sweeps can vary depending on the bank. Some banks might offer daily sweeps, while others might sweep funds only when the balance falls below the threshold by a specific amount. You can choose the sweep type that suits you the best.
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