Savings accounts offer easy liquidity but earn very nominal interest. However, by adding in the sweep-in facility to these accounts, it is possible to earn higher returns. Also, the depositor can withdraw funds from the account anytime, prematurely.
The 'sweep-in facility' allows bank to transfer any sum in excess of the amount stipulated by the customers from savings account to a sweep-in deposit, which then works like a fixed deposit (FD). While some banks may offer the flexibility of choosing the FD tenure, there are few banks which have fixed tenure.
Paisabazaar -- country's financial marketplace -- explains the 'sweep-in' feature with an example:
Suppose, Ronit has recently linked the savings account with a fixed deposit account for 1-year tenure. He opts for the sweep-in facility and chose a limit of Rs 50,000 beyond which any amount will automatically be transferred to FD.
Now, the balance is Rs 35,000. He receives Rs 40,000 as a cheque that he encashes into the savings account. Now, the bank balance reaches Rs 75,000. Therefore, the bank automatically transfers the excess of Rs 25,000 to the linked FD account.
While choosing a sweep-in, Pranjal Kamra, CEO, Finology, advises depositors to choose a lower threshold for conversion.
"This will help in generating higher interest rates," he opines.
The withdrawal in sweep-in deposit takes place in two ways -- LIFO (last in first out) or FIFO (first in first out).
In the LIFO method , the most recently booked FD is closed first for the purpose of withdrawal while in FIFO (first in first out), the first FD created by swept-in is broken first.
"This greatly affects the interest rate one earns as there is change in the FD tenure. It is always advisable to go for LIFO," suggests Kamra.
LIFO even earns better because the first FD swept is permitted to earn interest for a longer period.
Some banks may also charge a penalty for premature withdrawal.
So, it is important to ensure whether the FD tenure is aligned with requirements or not.
"It is better to diversify it across different tenure to avoid termination charges and earn higher interest rates," Kamra added.
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