The rate of inflation in India was 5.1% in the financial year 2020 and it is projected to be around 4.50% in the year 2021.
The rate of interest offered by most of the banks is around 3% for saving accounts which is not enough to fight such high inflation. Considering the above stats we can easily understand that we are losing cash by 1% to 2% each year.
Most of the time we transact using our saving account and we keep a substantial amount of funds in our saving account so it is needed to make sure we are getting good returns on our funds parked in our saving account.
We can opt for two options to get the highest returns on our savings account.
What is an Auto-Sweep account?
Auto-sweep is a feature that allows us to earn extra returns on some of the amount parked in the saving account. Auto-sweep divides our funds into two sections a. Saving Account b. Fixed Deposit.
The cash parked in FD generates more returns than the cash parked in Saving Account.
How does Auto-sweep work?
We need to set a threshold limit on saving account to enable the auto-sweep feature. The amount beyond the threshold will automatically be converted to an FD.
The term used for the transfer of the funds is ‘Sweep-out’.
The amount transferred to the FD will be in chunks of Rs. 5000 or Rs. 10,000 depending upon bank. Bank offers us chance to decide the frequency of transfer like weekly or monthly as per our convenience.
Let’s understand the Auto-sweep with an example.
Assume, Tejashri has Rs. 50,000 in her saving account and she activates the Auto-sweep on her account.
-The threshold limit of the account is Rs. 25,000.
-Rate of interest offered by the bank on saving account : 3%/ Year
-Rate of interest offered by the bank on FD: 6%/ Year
-Frequency of transfer: Monthly
-Min amount to be transferred: Rs.5000
Then, the bank will keep Rs. 25,000 in her saving account which will generate income at 3%/Year while the Rs. 25,000 parked into the FD will grow at the rate of 6%/Year.
Now, if she deposits Rs.5000 in account, the Rs. 5000 will be converted to FD.
Each time she deposits in her account and the amount reaches to Rs.30,000 bank will transfer the Rs.5000 to an FD.
How can I withdraw funds from the account?
Withdrawal of the funds works just like the regular way via ATM, cheque, internet banking, etc.
If the saving account has insufficient funds to fulfill the withdrawal request, an FD will be broken and the requested cash is provided to us.
The sequence of breaking the FD will be either LIFO or FIFO.
Whenever there will be a shortfall of the amount to be withdrawn an FD will be broken and the requirement will be fulfilled.
The process of transferring the funds from FD to the saving account is called as Sweep-in or Reverse-weep
Let’s consider Tejashri wants to withdraw Rs. 30,000 from her account but she has only Rs. 25,000 in her account then the bank will break an FD and provide her Rs. 30,000.
If she has an FD of Rs. 20,000 in FD she will continue to earn 6% interest on Rs. 15,000.
What are LIFO and FIFO?
LIFO and FIFO are the two types of systems by which the FD’s are broken to pull the required funds back into the Saving Account.
–LIFO: Last In First Out
As the name suggests the bank will break the last FD in case we need to withdraw funds.
–FIFO : First In First Out
As the name suggests bank will break the first FD in case you need to withdraw funds.
It is advised to use the LIFO in case you withdraw funds frequently so that the old FD can earn more interest on the other hand for less frequent withdrawal FIFO is recommended. So that we can earn more income from old FD’s and allowing new FD’s continue to grow.
Can I use this feature with the current account?
Yes, we can enable the feature on the current account as well. We do not get any interest on the amount parked in a Current Account but Auto sweep can allow us to win some with the Current Account as well.
As we know that we get penalized for breaking an FD. So we need to be cautious while enabling the Auto- sweep on our saving account. If we withdraw funds too early from an FD we may end up getting less interest than a regular saving account.
The penalty leads to a decreasing rate of interest ranges from 0.5% to 1% on the FD.
2. Flexi-fixed deposit account
A Flexi-fixed deposit account is another option to win higher returns on the savings. The account can be opened online or offline. Let’s move ahead to know more about Flexi-fixed account.
What is a Flexifixed Saving Account?
A Flexi-fixed Saving account is similar to an Auto-sweep saving account and offers the combined benefits of an FD and a saving account. We will understand the main differences between an Auto-sweep Account and a Flexi-fixed account here. A Flexi-fixed account involves creating an FD and linking it to the saving account.
How does it work?
Flexi-fixed accounts starts with opening a saving account and an FD. We need to link the saving account and FD, we have to do the whole work manually .
If we try to withdraw funds from the savings account and if it does not have enough funds to fulfill the requirement then the FD linked to the account will be broken and the requested amount is provided.
Let’s consider the example of Tejashri again,
Tejashri has Rs. 50,000 in her savings account. Then she can make an FD of Rs. 30,000 and linked it to her Savings account.
The rate of interest for a saving account is 3%/annum
The rate of interest for an FD is 6%/annum
Hence, she will be getting returns at 3% on 20,000 which is the amount kept in her savings account while the Rs.30,000 kept in FD will make returns at 6%.
How can I withdraw funds from the account?
The request for withdrawing funds is processed via saving account. We can withdraw funds by regular payment methods viz ATM, Cheque, Internet banking, etc
Ex. Tejashri want to withdraw Rs. 25,000 from her saving account but it has only Rs. 20,000. Then the bank will pull remaining Rs. 5000 from her FD and pay her Rs. 25000.
The FD account will still continue to grow at 6% with Rs. 25,000 left in.
How the FD is made?
It is one of the major difference between Auto-sweep account and Flexi-fixed Deposit account.
As discussed earlier, we have to create an FD manually. Each time you feel you have a surplus amount in your account you can convert it to an FD and link the FD to your saving account.
FD’s can be created online with internet banking or offline by visiting bank.
There is no restriction on the amount to make an FD provided we are following the standard guidelines of the bank for opening a regular FD.
The lock-in period and rate of interest for the FD is decided at the time of creating FD.
Follow this link to know more about the lock-in period, rate of interest, the tax applicable on income generate on an FD: Fixed Deposit Account [FD] in India
Which bank offers Auto-sweep and Flexi-fixed account?
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