As banks reduce the interest rates on savings accounts, depositors can consider sweep-in fixed deposits to maximise returns on surplus savings without sacrificing liquidity. It enables automatic transfer of funds above a predetermined limit to be invested in a fixed deposit that offers a relatively higher interest rate than a regular savings account.
It works by linking a savings account with a fixed deposit facility. When the amount in the savings account goes below the set limit, funds equivalent to this value get credited to the savings account automatically from the swept-in fixed deposit, keeping the rest of the deposit intact and continuing to earn higher interest rates.
How to open a sweep-in fixed deposit
An individual can opt for a sweep-in deposit account either at the time of opening a new savings account or by requesting it later through internet banking, customer care, or at a bank branch. Before choosing a sweep-in facility, one should carefully set the threshold limit at which funds are swept into fixed deposits to avoid frequent transactions or underutilised funds.
Adhil Shetty, CEO of Bankbazaar.com, says it is important to check the premature withdrawal terms, as breaking a deposit may result in a lower interest payout. “Understanding the tenure of the linked deposits is also crucial, as it impacts the applicable interest rate.”
Depositors must note that some banks may levy charges for using the sweep-in facility or may have minimum balance requirements, which should be reviewed. In terms of liquidity, sweep-in accounts offer excellent flexibility, as funds can be accessed almost immediately when needed.
Ideally, you should keep the minimum average balance in the savings account and sweep the rest of the amount into the fixed deposit to earn maximum interest. “Sweep-in fixed deposit offers you the interest rate equivalent to that of a fixed deposit and the liquidity of a savings account, as there is no restriction on the withdrawal limit of funds in the savings account with a sweep-in facility,” says Santosh Aggarwal, CEO, Paisabazaar.
How a depositor can benefit
Let us assume an account holder has deposited Rs 5 lakh in his savings account, having the minimum average balance of Rs 25,000, and he earns an interest of 2.75% p.a. on his savings account. Assume the fixed deposit rate offered for the auto-sweep fixed deposit facility is 5.5%.
So, if we calculate the interest earned on a savings account without an auto sweep-in facility, the interest earned would be Rs 13,750 (Rs 5 lakh x 2.75%).
Now, when the account holder chooses the auto sweep-in facility, Rs 25,000 will be present in his savings account, and Rs 4.75 lakh will be transferred to the swept-in fixed deposit. The interest earned here would be in two parts:
- Interest on savings account =Rs 687.50 (Rs 25,000 x 2.75%)
- Interest on swept-in fixed deposit = Rs 26,125 (Rs 4.75 lakh x 5.5%)
- Total interest earned with auto sweep-in facility = Rs 26,812.50 (Rs 26,125 + Rs 687.50)
- Additional interest earned through the auto sweep-in facility = Rs 13,062.50 (Rs 26,812.50 – Rs 13,750)
Banks offering higher rates
While some banks are offering interest rates of up to 7% on savings accounts compared to bigger banks, depositors must examine the fine print carefully. Higher interest rates often apply only to certain balance slabs, which means only the portion of the balance within a specific range earns the higher rate. For instance, Yes Bank is offering 6% on savings bank deposits above Rs 50 lakh, RBL Bank is offering 7% on deposits above Rs 25 lakh.
Various small finance banks (SFBs) are offering relatively higher interest rates on savings accounts, and deposits up to Rs 5 lakh are also insured by DICGC. An individual can park funds in these savings accounts and get a higher interest rate. However, the highest interest rate is offered for a specific range, and that too, only on the incremental balance.
Depositors should check the latest interest rate offered by all such SFBs and pick the best option depending on the amount they want to park in the savings account. “If the surplus amount is more than Rs 5 lakh, you can choose to deposit this amount in bank accounts of multiple SFBs that offer the highest interest rates for your range,” says Aggarwal.