Banks are now trying to get customers to use sweep accounts to ensure that they retain money with the bank as these accounts enable the investor to earn higher returns. However, investors should not just look at the headline numbers and expect this to be their returns.
It is important for them to look at several factors that will impact the way their money is handled and the convenience it generates.
Understanding Sweep Accounts
A sweep account provides the benefit of a savings account as well as a fixed deposit without additional effort.
The sweep facility involves the balance in the savings account beyond a certain limit being converted into a fixed deposit. This enables a higher rate of earning on the money transferred to the fixed deposit. The investor can use the full amount in the account for their various spends and if the amount used is more than the figure lying in the savings account, then the fixed deposit will be used for the payment.
The benefit of this is that everything is done automatically and seamlessly. At the same time, the investor does not have to pay a penalty for the breakup of the fixed deposit before maturity as they would have to do normally. This ensures that at the end of the day the investor has higher earnings from their money.
Minimum Amount
The first factor to see when looking at a sweep account is the minimum amount over which the money in the account will flow to the fixed deposit. The higher the minimum amount for the account, the less the benefit for the account holder because a larger amount will lie in the savings account, which earns a lower rate of return.
Sometimes, the bank fixes a very high figure as the minimum amount, which ensures that the benefit for the account holder goes down. For example, if the minimum amount above which the transfer has to be made is Rs 20,000, then this is far better than an account where the minimum amount required is Rs 1 lakh. If the total balance in the account is Rs 1.5 lakh, then in the first account, Rs 1.3 lakh will be in the fixed deposit, while in the second account, it will be just Rs 50,000.
Period Of Fixed Deposit
The period for which the fixed deposit is made is crucial because this will determine the earning for the investor. This period will actually determine the ceiling or the maximum return that the account holder will earn. For example, it is common for these types of accounts to transfer the money to a fixed deposit of one year. This means that the rate of interest on the one-year deposit will be applicable, but the catch is that this will be applicable only if the money is held for a period of one year.
The moment the money in the account is used, the fixed deposit is broken and when this happens, the interest rate of the period for which the deposit was held will be applicable. So, if part of the money is taken out after three months, the interest rate earned on this money will be the interest rate applicable for a three-month deposit and not the one-year rate.
Minimum Breakage Of Deposit
The amount for which the fixed deposit is broken when the money is used in the savings account is very important. The lower the amount for which the deposit is broken the better it is as the remaining amount remains as the fixed deposit.
For example, if a bank has fixed Rs 1,000 as the amount of breakage of the deposit and Rs 4,500 needs to be transferred from the fixed deposit to the savings account, then Rs 5,000 will be the amount of fixed deposit broken. If the same figure is fixed as a minimum of Rs 10,000, then in this case, Rs 10,000 would be transferred.
Selection
A sweep account is a beneficial product, especially when a person is keeping large amounts in their savings account. The best thing is that once the account is set up, the entire transactions take place automatically and there is no need for any intervention either at the time of transfer of the amount to the fixed deposit or the return of the money to the savings account.
It is also important to not get influenced just by the rate being touted in promotions because it is likely that when the money is used earlier, then the actual rate earned is lesser than this. Being realistic and knowing the workings will help in ensuring that the real benefit of the account is received.
Arnav Pandya is founder Moneyeduschool
The views expressed here are those of the author, and do not necessarily represent the views of BQ Prime or its editorial team.
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