Interest rates on fixed deposits are high. And everyone is investing in them for their short-term goals to get the best interest rates.
And banks are providing some add-on features like auto-sweep facilities (sweep-in and sweep-out) to make it easier and more attractive. Let’s discuss these and check whether it is helpful for you.
Estimated read time: 4 minutes and 23 seconds
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What is a fixed deposit (FD)?
For starters, fixed deposits, also known as term deposits, are a type of savings account offered by banks. They are a safe way to save money and earn guaranteed interest.
When you open a fixed deposit account, you agree to deposit a certain amount of money for a fixed period of time, typically ranging from a few months to a few years.
During this period, the interest rate on your deposit remains fixed, hence the name fixed deposit. This means you know exactly how much interest you will earn on your FD at the end of the term.
Fixed deposits usually offer higher interest rates than regular savings accounts, which makes them an attractive option for people looking to earn more on their savings.
However, the interest rate offered by a bank on a fixed deposit may vary depending on the term of the deposit and the prevailing market conditions.
One important thing to keep in mind when opening a fixed deposit account is that your money is locked in for the duration of the term. This means you cannot withdraw your money before the end of the time period without incurring a penalty fee.
However, some banks offer the option of premature withdrawal, but in such cases, the interest rate offered may be lower than the rate applicable for the entire term.
To make fixed deposits more attractive, the banks have offered more features like auto-sweep facilities (sweep-in and sweep-out). Let’s discuss them and see whether they are helpful for you.
Auto-sweep facility (Sweep-in and Sweep-out)
Generally, you open a fixed deposit when you have a lump sum amount. But what if you don’t have a lump sum amount? What if you want to save some portion of your salary in FD?
There is the recurring deposit (RD). In RD, you can save money monthly and earn interest similar to FD. But you have to commit some amount every month. And many salaried people are not comfortable committing to a fixed amount.
And what if you just want to earn higher interest on the money lying idle in your savings account? For that banks have launched Auto-sweep facilities.
The auto-sweep facility is an add-on feature available with a fixed deposit. It allows you to earn higher interest rates on your savings while still providing liquidity.
In an auto-sweep facility, your savings are automatically transferred from your savings account to a fixed deposit account when your balance exceeds a certain threshold.
Let’s say you have a savings account with a balance of ₹15,000 and an auto-sweep facility with a threshold of ₹25,000. When you deposit an additional ₹30,000 in your savings account, your account balance becomes ₹45,000.
With the auto-sweep facility, the excess amount of ₹20,000 over the threshold of ₹25,000 is automatically transferred to a fixed deposit account. This is a sweep-in facility.
With sweep-in, the amount transferred is the excess over the threshold amount, and the term of the fixed deposit is usually short, ranging from a few days to a few months. Most banks allow you to decide the threshold limit and the term of the FD.
The interest rate you earn will depend on the term you selected for your fixed deposit account.
Now, suppose, after a few days, you need ₹40,000 for an emergency. You can withdraw this amount from your savings account. The auto-sweep facility (sweep-out) would automatically break the fixed deposit account and transfer the money back to your savings account.
This way, the auto-sweep facility allows you to earn higher interest rates on your savings while providing liquidity when required. It is a great way to maximise the returns on your savings without compromising on liquidity.
However, it is necessary to note that some banks have minimum balance requirements and charges associated with the auto-sweep facility. Therefore, it is crucial to read the terms and conditions carefully before opting for auto-sweep facilities.
Drawbacks of an auto-sweep facility
While auto-sweep facilities have several benefits, there are also some drawbacks that you should know before opting for this facility.
One major drawback of the auto-sweep facility is the penalty for premature withdrawal.
The bank creates a new fixed deposit whenever you deposit an additional amount in your savings account beyond the threshold limit. So, what happens is, after some time, you might own a batch of fixed deposits like FD1, FD2, etc.
And the bank uses either LIFO (last in, first out) or FIFO (first in, first out) to break an FD to fulfil your withdrawal request.
In LIFO, the most recent fixed deposit created is the first to be liquidated. And in FIFO, the oldest fixed deposit account is the first to be liquidated.
In both cases, a premature withdrawal will lead to a penalty and loss of interest. And sometimes, because of this penalty of 0.5% or 1%, you may earn an interest lower than your savings account.
Another drawback is that some banks may charge a fee for the auto-sweep facility, which could reduce your interest earnings.
Additionally, the interest rate offered on the fixed deposit may not always be the most competitive. While the interest rate provided is regularly higher than that of the savings account, it may not be the best available in the market.
Should you use an auto-sweep facility for your FD?
If you are someone with frequent transactions in a savings account. It would be wise to avoid the auto-sweep facility.
Because it would be hard to track the new FDs created, and the chances of prematurely breaking the FD and paying penalties are high.
One suggestion would be to have a separate savings account to utilise the auto-sweep facility. You can deposit your excess money in this account and create FDs. Also, small finance banks offer higher interest rates.
Don’t forget that interest income from fixed deposits is taxable. Banks might deduct a TDS while crediting interest to your account if the amount of interest is beyond ₹40,000 annually.
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