Do you have a Bank Account?
Off-course you do! How much money do you have in your account? 5,000? 20,000?
or a few lacs? If you have a lot of cash, lying idle in your Bank Account, and
at the same time you don’t want to commit to long-term investment, you need to
enable the Auto-Sweep facility in your Savings Bank account. This will make
sure you earn good interest on a major part on the cash lying in your Savings
account.
What is
Auto-Sweep Account ?
“Auto Sweep” is a
facility which provides, the combined benefits of a Savings Bank account and Fixed Deposits. Auto-Sweep facility interlinks
your saving bank account with a Deposit account and makes sure any extra amount
lying in your bank account above a threshold limit is automatically transferred
to Fixed deposits and you earn better interest on your money.
How ‘Auto Sweep’
works?
This is how
Auto-Sweep works. You define a “threshold limit”, and money up
to that limit will be in the form of cash in your savings account and any
amount above this, “limit” will automatically be converted into a Fixed Deposit
and you will start earning normal FD returns on that part of the money. At any
point in time, if you need money more than is lying in your bank account, the
money lying in the Fixed Deposits is Reversed-sweeped into your savings account
and you can withdraw the amount you wish.
Example
Ajay opens a
new Savings Bank account with SBI. He enables Auto-Sweep facility on his
savings bank account and defines the threshold limit of Rs 30,000 . Now suppose
he has Rs 10,000 lying in the bank, He will be earning normal 3-3.5% interest
on this money. After that if he deposits Rs 60,000 in his account, his total
balance would be 70,000. But as this is above his “threshold limit”, the extra
amount of 40,000 will be converted into a fixed deposit automatically and start
earning returns equal to normal Fixed deposits with SBI (for example 8%). This
way he always has 30,000 in his account for his daily requirements, and he has
40,000 converted into Fixed deposits which again is available to him incase he
requires it.
Now suppose he
has to withdraw 10,000 from his account, he will actually withdraw it from the
cash lying in saving bank , and his balance will reduce to 20,000. However on
the other hand if he wants to withdraw Rs 50,000 . then in that case, as his
account balance will be just 30,000, an additional Rs 20,000 will be
auto-reversed from his Fixed Deposit and he can withdraw total 50,000 .
Opportunity cost
A lot of us don’t bother about how much idle
money is lying in our account and for how long. This happens because we think
“I might need it soon, so lets not commit to any investment.” But then, the
money keeps lying in the bank for months and months and sometimes even years.
Suppose your account has Rs 1 lac for 1 year,
it will earn 3.5% interest on it, which is Rs 3,500 for a year. However if you
have auto-sweep enabled in your savings account with threshold limit of Rs
20,000, the additional 80,000 will actually be in form of a fixed deposit and
it will earn an interest of 8% (assumption). In this, you will earn 3.5% of
20,000 which turns out to be Rs 700 and 8% of 80,000 which is Rs 6,400 , a
total of 7,100 , which is almost 100% more than the first case .
A lot of people have much more than 1 lac in
their accounts, not just 1 lac. You can earn some extra returns if you just
enable auto-sweep on your saving account . So find out if your bank provides
the facility, just do it, and get it right away!
Also note that different banks have different
names for this facility. For eg., ICICI Bank calls it ”Auto Sweep” , HDFC Bank
calls it “Sweep-In” account , and SBI calls it “Saving Plus.” . Here is a list
of other banks and the name by which they call this Auto-Sweep facility (thanks
for Gopal Gidwani for the info)
IDBI Bank – Sweep-in Savings Account
Axis Bank – Encash 24
Union Bank – Union Flexi Deposit
HDFC Bank – Super Saver Facility
Bank of India – BOI Savings Plus Scheme
Oriental Bank of Commerce – Flexi Fixed
Deposit Scheme
State Bank of India – Multi Option Deposit
Scheme
Allahabad Bank – Flexi-fix Deposit
Bank of Maharashtra – Mixie Deposit Scheme
Corporation Bank – Money Flex
United Bank of India – United Bonanza Savings
Scheme
Disadvantages of
Auto-Sweep Account
Auto-Sweep has some disadvantages too. In
general the interest rates of normal fixed deposit and FDs under Auto-Sweep are
same, but some banks charge a penalty if the FD under auto-sweep accounts are
broken before some duration like 1 yr and 1 day . But I think that’s
fine. If not 8% , you will at least get 7%, still better than 3.5% .
Some banks are also known to give simple
interest on the Auto-sweep Fixed Deposits and not compound interest as in case
of normal fixed deposits .
Don’t over do it
While Auto-sweep is a wonderful thing for
salaried class people who want to maintain liquidity, as well as want to earn
more interest on their unused money, one should not over do it. If you are very
sure that the money lying in your account will really not be used for long,
better to use the normal Fixed deposit or Debt funds. Only if you
are unsure of your money lying in bank and when you might need it, you should
be using Auto-Sweep facility.
The way auto-sweep works, it makes it an ideal place to park emergency funds . So if you have kept 6
months of expenses as your emergency fund in Saving Bank, then you can enable
auto-sweep facility and set threshold limit as 2-3 months of expenses, so that
rest of the money can earn a better interest.
