Sweep account is a great attraction – it offers the flexibility of the savings account with the high returns of a fixed deposit. Most customers prefer to keep their money in such accounts because it lets them be free from the hassle of making a deposit (to earn higher rate of interest) or having to break it when one requires funds.
Banks also feel that they can attract more customers with these accounts so they actively market them. However, as a customer it would be useful for you to know some facts about sweep in accounts to make the most of them.
What is auto sweep account
A quick overview about the auto sweep accounts. This is generic name that we are using here; each bank may over use a different product name for it like flexi deposit, two in one account etc. How it works is simple: once the amount in your savings account exceeds the threshold, the balance is transferred to a linked FD in specific multiples (usually 5000) where you get the FD rate of interest for your money.
For example, the threshold limit in your account is 10,000 and amount is transferred in multiples of 5000. You deposit 14,000 no amount is transferred to the FD however if you deposit 16,000 then 5000 is transferred to the FD and 11,000 stays in your savings account.
Above is an example of auto sweep. Reverse sweep happens when the amount from the FD is moved to savings account. This may happened due to two reasons; one the withdrawal amount whether through cash or check exceeds what is there in savings. Second is the condition when the FD needs to be broken though the amount is sufficient in the savings but the balance in the savings account has gone beyond the minimum balance limit.
How to make the best of your sweep account
A few small facts mentioned below can help you in optimizing the use of your sweep accounts.
1. Keep a Check on Balance: Often, if you do not use the account very regularly, you may forget to keep a track of the balance thinking that there are funds lying in your account at all times. Though you may not withdraw the amount there are small charges or debits in the account which happen on account of service charges by the bank. If you barely have the threshold amount in your account this will cause the balance to go below the minimum requirement and you will end up losing interest.
Continuing from the above example: The balance is 11,000 in the savings account; a check for Rs. 800 is issued which makes the balance 10,200. Annual debit card charges are 275.
The savings account balance does not cover the debit card charges which means the FD will have to broken for very small amount and you will not be aware of it. Thus it’s better to keep the balance comfortably above the threshold limit so that you do not lose on interest.
2. Duration of FDs: By default, the fixed deposits are made of 12 months but often banks offer lucrative rates for different period FDs like 366 days or 790 days etc. You realize that that difference between a year and 366 days is just a day but the interest rate can vary from 0.5% to 1.5% also.
Most banks allow you the facility to change the duration of the flexi deposits. Having said that don’t become overzealous and run for a change in the duration every time there is interest rate revision. This is due to two reasons:
- The change will be effective for future FDs only and;
- It does not make sense to break FDs and change the duration as the potential gain is rarely worth the effort in monetary and operational terms.
You can commit to a longer duration FD also; there are no penalties involved. If the FD gets broken prior to the maturity day the rate will be adjusted as per the duration for which the funds have been kept.
3. Threshold Limit: Before opting for a sweep account be sure to choose an account with low threshold limits for obvious reasons. One bank may offer variety of accounts with varying threshold limits; they may offer some privileges or frills for the higher threshold accounts.
If the account has a threshold limit of 50,000 with transfer in multiples of 5,000, then up to 54,000 will lie idle in an account. Compare this to the above example where 15,000 are sufficient to start a FD.
So check this before you opt for a sweep account. Also do keep in mind if you opt for a sweep accounts then some banks may have a higher minimum balance requirement vis-a-vie normal savings account so you should keep this in mind while making your choice.
Why sweep account can be a problem
Rarely does anything come in life without a “but”. Below are a few features or drawbacks that can spoil the party for sweep accounts.
1. Confusing Statements: For those who have frequent transactions these statements can be very confusing and difficult to track. What’s more, those transacting very often may hardly earn any interest at all! You are required to leave the funds for a minimum of 15 days to earn some kind of interest (generally).
If your FDs keep breaking before that then all the entries in the statement are for nothing. Getting updates for debits for creation of FDs can be confusing and irksome.
2. Tax Implications: There are multiple facets to the tax implications. First in case you let your funds lie in the savings account and by default they go the FD you will end up paying tax without even realizing. Second even if you want tax planning is difficult for these FDs.
You cannot fill a blanket 15G/H for them, each time a fresh FD is made you will have to get the status update and if you wait till the end of the financial year you may realize that the tax has already been deducted because the interest exceeded the 10,000 mark during the financial year.
This will be true for those sitting on large savings balances in sweep accounts which are not advisable due to two reasons:
- it is not tax efficient;
- it does not serve the purpose of long term investment planning.
Sweep accounts are a convenience that has been offered to the customers by banks. One can make the most of a sweep account but one cannot forget at the end of the day that they are a variation of the savings account and are not an investment product. Make the best of your sweep accounts but don’t treat them like a long term investment.