I am sure you must be having a savings bank account with at least one of the banks in the town and must be enjoying the services of it. How much interest you are getting by keeping your money in this account? Certainly, you must be getting an interest ranging between 3 to 3.5%. I have seen lot of people whose savings account statement shows lakhs of rupees in their account at all points of time. Actually, out of their habit and may be because of lack of care and prudence, they usually keep lot of money in their savings account with a belief that they may require this amount in very near future. Due to this reason, they do not invest their funds in fixed deposit schemes and other investment alternatives. But have you have ever thought that the money you have kept idle in account is only providing you the benefit of liquidity and not yielding good return.
Actually, the problem is not with your money, the real problem lies with the way you handle your money. With the same savings account, you can enhance your returns by following a very simple solution. Just opt for the auto sweep facility of your bank and see the magic.
What is Auto Sweep Account?
Auto Sweep account offers twin advantages, one in the form of savings account and the other in the form of fixed deposits. If you opt for this account, then the bank will link your savings account with your fixed deposit account. While taking up this service, you will be asked to select a threshold limit. This threshold limit is the maximum amount that you want to keep in your savings account. Any amount over and above this limit will automatically be transferred to your fixed deposit account, thereby giving a better yield to you. Different banks have different names to this service.
How does an Auto Sweep Account Works?
As explained earlier, you need to define a threshold limit and any surplus balance above this limit will be transferred to a fixed deposit account. For example, your threshold limit is Rs. 50,000. You already have Rs. 10,000 in your account and puts in Rs. 80,000 more. Now, your total balance in the account would be Rs. 90,000. With auto sweep technology, amount above Rs. 50,000, i.e. Rs. 40,000 in this case will be treated like a fixed deposit and you will get a higher rate of interest on that amount. This is one side of a coin. The other side of the coin says, in case you want to withdraw Rs. 70,000 then the auto sweep will automatically reverse the transaction for Rs. 20,000 from your fixed deposit to savings account and you will be able to withdraw this amount without any impediments.
Advantages of Getting Auto Sweep Enabled in Your Account
- Same level of liquidity that you were enjoying with your savings account.
- High profitability as the amount over and above your threshold limit will earn interest rate equal to the fixed deposit rate of the bank.
- Best suited to those who want a high rate of return as compared to the savings bank rate and at the same time do not want to lock their funds in fixed deposit.
Drawbacks of Getting Auto Sweep Enabled in Your Account
- In case you are too frequent in your transactions/ sweeps, it may become difficult to keep a track of your money and at your level the calculation of the actual amount of interest will become cumbersome.
- There are some banks who have the policy of calculating simple interest on auto sweep funds, whereas then fixed deposits provides compound interest. Considering this point alone, it will be better not to park your funds in savings account and it will be more profitable to deposit them directly into a fixed deposit account.
- Some banks may also specify a minimum period for fixed deposits and any pre-mature withdrawal from the fixed deposit will mean a penalty or deduction from the total interest. For example – if a bank is offering 8.5% interest rate on fixed deposits and has restricted the withdrawal from your fixed deposit for say minimum 6 months. Now any pre-mature withdrawal will attract a penalty of 1%, i.e. you will get only 7.5% return on that amount. However, this 7.5% return still seems to be a better proposition as compared to 3.5% interest rate which you were getting by holding your money in savings account.
Word of Caution
If you do not foresee any major withdrawal from your account in near future, it is always better to deposit your idle money in fixed deposits or in some other investment avenues.
