Sweep-in fixed deposits encourage new savings, whereas overdrafts against FDs preserve your existing savings
You may often get into a situation when you have a temporary fund requirement but you don’t want to take a loan to meet it. If you also have money invested in a fixed deposit (FD), you might be looking at it to raise the required amount as it usually offers a lower interest rate than a personal or a business loan. One way would be to liquidate that FD to meet your liquidity needs, but as the requirement is temporary, you may not want to sacrifice the locked-in rate and risk your FD plan. So, what else can you do?
Sweep-in FDs and FD overdrafts are two such products that can allow you immediate liquidity without sacrificing your FD plan. However, both the products have their pros and cons, and knowing them can help you make the right choice.
You may often get surplus funds in your savings or current accounts that usually offer zero or low-interest returns on your parked fund. To fetch a higher interest rate, you may opt for a sweep-in FD option in your bank account. Under this option, you have to give a standing instruction to your bank that whenever the balance in your account crosses your stipulated threshold, such excess funds will automatically get converted into an FD.
Interest on such a FD depends on the investment period but is usually higher than the savings account interest rate. Sweep-in FD tenures range from one year to five years. Whenever you withdraw money more than the balance in your savings/current account, such a deficit amount is swept from your sweep-in FD to your saving/current account without disturbing the entire FD.
The bank allows this facility to create an overdraft against an FD by keeping it as a lien. Banks usually allow overdrafts up to 90% of the FD value. Interest on FD overdrafts ranges from 1% to 2% above the underlying FD rate. For example, suppose the FD interest rate is 6% p.a. In this case, the bank may charge around 7% to 8% interest on the OD facility. Interest on an FD overdraft is calculated on a daily basis. If you utilise the fund from the OD facility for 10 days, the banks will charge you interest only for 10 days, and you continue to get interest at the same rate on your entire FD amount.
Which is more beneficial?
In an FD overdraft, you have to pay excess interest of around 1% to 2% above FD interest. On the other hand, in a sweep-in FD, you have to forgo interest on the utilised amount, which is equivalent to the interest applicable on the FD for that tenure, i.e., you don’t need to pay any extra interest. Later, you can deposit the amount again and get the sacrificed interest by staying invested for the desired tenure. The FD overdrafts are beneficial for investors looking to make a lumpsum investment at an attractive interest rate offer. Sweep-in FDs are beneficial for investors who often get a large amount of funds for a brief period.
Overdrafts against FDs allow you the facility to meet any temporary liquidity needs without disturbing the FD corpus. On the other hand, sweep-in FDs encourage you to park more funds in the bank account so that you can earn a higher return on them. In short, sweep-in FDs encourage new savings, whereas overdrafts against FDs preserve your existing savings.
Which one should you go for?
Overdrafts against FDs are simple products that are easy to understand by most investors. The user just needs to focus on returning the utilised amount as early as possible to save the interest. On the other hand, sweep-in FDs can be a little complicated to understand. The interest slab on sweep-in FDs may vary with a change in the key policy rates by the Reserve Bank of India. You may also not find it easy to understand how interest is calculated on your sweep-in FD when you withdraw and deposit money from it several times.
The writer is CEO, BankBazaar.com