Seeing a hefty sum of money in your bank can bring a smile on your face. It is a dream for many to have a sizeable amount of money in the savings account until the end of the month. However, the money in the savings account is next to ideal. While it is vital to have a certain sum of money to take care of the day to day expenses, the excess cash lying in your savings account can be put to better use by investing in ways that would give a higher rate of returns.
We typically look at complicated products with the hope that it will provide us with a higher interest rate. However, we tend to overlook what is lying in front of your eyes. One such easy feature of the banking industry is the auto sweep facility.
The auto sweep facility has the best of both the worlds of saving account and fixed deposits. It provides with the flexibility of the savings account along with the higher interest rate of fixed deposit. The savings account and fixed deposit are linked, and the customer defines a monetary threshold limit. Typically, the limit can be anywhere between Rs.25,000 to Rs.1 lakh.
Once you opt for the auto sweep facility, the amount above the threshold level is automatically invested in fixed deposits. In this way, you can earn higher interest on the idle money remaining in your savings account.
On the other hand, when the amount in your savings account falls below the set limit, the shortfall in the savings account is catered by automatically transferring money from your linked fixed deposit to your savings account.
We know now that the excess amount is transferred automatically to a fixed deposit and vice versa. Even if your money is saved in a fixed deposit, you don’t have to worry about the liquidity.
The excess amount in your savings account is made into a one year FD. However, the tenure of the FD will vary from bank to bank. It will be better to ask your bank regarding the default tenure.
But how is your savings account funded in case your bank balance runs lower than the set amount. It has two ways. The first one is called the Last In First Out (Lifo) method. Here, if your balance in the savings account is less than the predetermined limit, the last FD that was created is broken, and your savings account is credited. The second method is called the First In First Out (Fifo) method. In this method, the first FD is used to fund the savings account.
The last in First Out method generates more returns as the FDs that were created earlier can continue to earn interest. Also, the previous FD that was created would need to remain fixed to give decent interest.
Let’s take an example to make it clearer to understand. Let us assume that you have opened a savings account with an auto-sweep facility where there is no minimum balance. You have deposited Rs. 1 lakh and you have taken the threshold limit as Rs. 25,000. Here we see that the savings account have an extra of Rs.75,000. In this case, the extra Rs.75,000 is transferred to a FD. Both the deposits will continue to earn different interest rates. After three months, if you withdraw Rs.10,000, then the shortfall of Rs.15,000 (Rs.25,000 – Rs.10,000)will be auto reversed from your FD.
Although there are many benefits of auto sweep facility, there are also a few drawbacks of this facility. One of it is that pre-mature withdrawal may attract a penalty. Some banks may also give a simple interest rate on the FDs created through the sweep-in process instead of the compound interest rate that is typically taken in regular fixed deposits. Also, some banks may charge fees for this facility. Hence, it is essential to know the charges before opting for auto sweep facility in your savings account.
The auto sweep facility is helpful if you have extra cash in your savings account. If there is less likelihood of having extra money, then a sweep in facility won’t be very beneficial to you.
The facility is for people who make only a few withdrawals every month. If you make several withdrawals in a month, the auto sweep facility may not be for you.
Auto sweep is an easy and automatic way to earn a higher interest rate than your savings account. However, you need to calculate whether taking the facility will enhance your finances or not.
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