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While most banks do not have a penalty for breaking the auto-sweep FDs, the facility should be used cautiously
While most banks do not have a penalty for breaking the auto-sweep FDs, the facility should be used cautiously

How to use flexi and sweep-in fixed deposit facility effectively

  • If you make withdrawals frequently from your savings account which is linked with flexi and sweep in fixed deposit facilities, you will lose out on interest
  • Sweep in and flexi- fixed deposits are particularly useful for building up your emergency funds

Flexi and sweep in fixed deposit facilities can provide an easy way to get better returns on your deposits in a savings bank account. However, if the facilities are not used effectively, you may not get the desired return. In other words, if you make withdrawals frequently from your savings account which is linked with flexi and sweep in fixed deposit facilities, you will lose out on interest. Further, this will also complicate the calculation of the returns, making it difficult to compute how much interest you have actually managed to earn during the year.

Let’s first understand how flexi and sweep in fixed deposit facility works for you

1) Sweep-in fixed deposit

The banks provide sweep-in fixed deposit facility to their customers wherein customer’s saving account gets linked to a fixed deposit account. To avail this facility, the savings account holder needs to set a specific money transfer limit for a specific period of tenure (the tenure of the deposit is normally one year but it can vary and go up to five years, and the interest rates can vary accordingly). When the balance in the savings account goes beyond that limit, the surplus balance gets automatically transferred to the linked fixed deposit account.

For instance, you have linked your savings account with your sweep in FD account for one year. Now, when you opt for the sweep-in facility, you will have to set a limit (for example 50,000) beyond which any amount will get automatically transferred to the FD account. Let’s say, your current balance is 40,000 and you received 30,000 from a client that you transferred to your savings account. In such a case, your bank balance will rise to 70,000 which in this case will be 20,000 above the limit you had set. Hence, the bank will automatically transfer the excess of 20,000 to your linked FD account.

“Sweep in deposits are for longer periods like 181 days or 366 days and are typically available only to premium account holders. In some cases, the interest may not be compounded too," said Mrin Agarwal, Founder Director, Finsafe India Pvt Ltd.

2) Flexi-fixed deposit

A flexi-fixed deposit is a special kind of deposit scheme offered by banks. In flexi- fixed deposit, the depositor is required to manually add money to their deposit account. The depositor opting for a flexi FD gets the benefit of both the liquidity of savings accounts and the high returns of fixed deposits.

As mentioned, in a flexi deposit, the depositor has to manually open the deposit for the desired tenure, whereas in a sweep in deposits, any amount above a threshold gets swept into a fixed deposit. Furthermore, in case of sweep in deposits, amounts are automatically swept out, without any penalty, when the savings balance falls short.

How you should make these facilities work effectively

Although sweep in and flexi- fixed deposits provide better returns along with liquidity, these facilities are particularly useful for building up your emergency funds. Agarwal said that while sweep in deposits provides flexibility, they should be chosen only if the depositor can hold funds for longer periods and not have too many transactions. “Before investing, depositors should study the terms regarding minimum threshold, the methodology followed for reversing funds along with the other factors," said Agarwal.

Adhil Shetty, CEO, BankBazaar.com explained that banks have different structures for their auto-sweep facility, and it is essential to understand them clearly to leverage them effectively. “In the first place, though some banks may allow you to set the minimum average balance (MAB) beyond which the money in your savings account would be moved to an FD, most banks have a fixed MAB and threshold limit of the FD. How the funds move between the savings account and the FD can also vary between 'Last In First Out (LIFO) or on 'First In First Out (FIFO). “In general, the LIFO method will earn better because the first FD sweep earns interest for a longer period," said Shetty.

While most banks do not have a penalty for breaking the auto-sweep FDs, the facility should be used cautiously. Shetty said, “It is better to not use the auto-sweep as your primary/expense account. This is because each time your income comes into the auto-sweep savings account, the amount over the MAB would be converted into one or more FDs. Over the month, as you pay against different expenses, the amount in the savings account gets depleted, and some of your FDs will be liquidated to move the money into the savings account. If you make withdrawals frequently from the FD, you will lose out on interest, no matter how much you put into the account. This is because the interest is calculated taking into account the number of days the FD was with the bank. So, if the FD tenor was for a year but you withdrew a sum within 45 days, then the interest applicable will only be for 45 days.

Thus, if you want to earn better returns on your savings account deposits, you can set-up a sweep-in or flexi fixed deposit facility with a non-primary savings account and create a corpus that you can dip into only during emergencies.

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