Sweep-In FD Vs Liquid Fund: What’s your best option?

You may often get surplus money in hand, but may not have a plan to deploy the same in an appropriate investment instrument. In such a situation you’ll lose the return till the fund remains idle in your hand. The best way is to immediately invest the money as soon as you receive it unless you have a spending plan.

Sweep-in FD and liquid funds are two attractive investment options available in the market where you can deploy your surplus fund, but it’s important to use them in sync with your financial needs. So, let’s understand which is a better option for you – a sweep-in FD or a liquid fund?

Pros & cons of sweep-in FDs

When you keep your money in a savings account, it usually earns a very low rate of interest which is around 3% to 3.5% pa. If it’s a large sum, you may lose out a substantial amount in the long term, compared to other investment options.

The inflation is hovering around 5% over the last few years, which means a return on investment below the rate of inflation would result in a negative real return. So, to avoid such a situation, most banks nowadays allow you to set up auto sweep-in FDs in your bank account. In auto sweep-in FDs, you can fix a cut-off limit in your bank account and if the account balance increases above your set limit, the excess fund automatically gets transferred to the linked FDs.

The tenure of the sweep-in FDs varies from bank to bank, usually offered for a short term i.e., up to 1 year, but in some cases, it may go up to 5 years. Normally, banks allow transferring excess funds in multiples of Rs 1000 to sweep-in FDs, creating a minimum FD size of Rs 5000.

For example, your bank account’s cut-off limit is Rs 50000 and the minimum sweep-in FD limit is Rs 5000 with a multiple of Rs 1000. If your account balance increases to Rs 59000, the excess amount, i.e., Rs 9000 will be transferred to the FD account.

The auto-sweep-in FD’s interest depends on the investment tenure. Normally sweep-in FDs use the Last In First Out (LIFO) method when withdrawing money from your sweep-in FD before their maturity. It means if your bank account balance has a lower balance than required for the payment of a financial instrument such as a cheque or SIP mandate, the amount is withdrawn from the sweep-in FD using the LIFO method to settle the deficit. Thus, sweep-in FDs offer you a very attractive interest rate and at the same time a high level of liquidity as well.

If you often withdraw money from the sweep-in FDs, the amount withdrawn gets interest for the tenure it remained invested. So, sweep-in FDs suit people who don’t have to break the FD before its maturity.

Pros & cons of liquid funds

Liquid funds are one of the popular debt funds that invest in short-term assets such as debt securities with a maturity of up to 91 days. There is no lock-in period in a liquid fund, so the investors get the option to exit their investment any time (subject to a graded exit load for investment up to 6 days). A redemption in a liquid fund is processed within T+1 days.

The return on liquid funds usually matches the interest rate offered on the FDs by most of the banks, and is higher than that of the savings account. The 1-year return on liquid fund investment ranges around 6% to 7% pa.

If you plan to partially redeem the investment in the liquid fund, you get the return offered on it till the date of redemption and the remaining fund is also not disturbed.

The investment in liquid funds can vary depending on the market situation and performance of the particular fund.

What’s the best choice for you?

As FDs offer guaranteed returns, you may not want to miss out on the lucrative option. However, premature closure of an FD can take away the entire benefit. On the other hand, liquid funds are market-linked products and you may not get a guaranteed return.

Adhil Shetty, CEO, Bankbazaar.com, says, “The rate of interest on the sweep-in FD account will be similar to short-term FD rates. The excess amount that is invested through the sweep-in facility will earn the same interest as the FD. Also, sweep-in basically allows investors to earn a higher return than the savings account on the surplus money.”

A well-performing liquid fund should beat its benchmark as well as its peer funds, but investors must also verify that the fund has done well consistently. “This can be checked by looking at its past returns. You can go for a direct fund with a low expense ratio. The returns of the two options are not likely to be too different. But the difference is forward returns versus past returns. The FD guarantees a forward return whereas the liquid fund can only advertise its past returns and can’t confirm a fixed rate of future return,” adds Shetty.

You can park your surplus fund in both sweep-in FDs and liquid funds in a suitable ratio, say 60:40, 50:50 or 40:60. You can fulfil your liquidity requirement via liquid funds and stay invested in the FDs till maturity to get the maximum interest on it.