A savings account is widely regarded as one of the most reliable and accessible options for parking idle funds. It allows you to deposit and withdraw money at any time while earning interest. However, the interest rates offered by banks and financial institutions on savings accounts typically range from 4-5%, which is comparatively lower than the returns provided by Fixed Deposits (FDs).
FDs are financial instruments where you deposit a fixed sum for a predetermined period at a specific interest rate. While FDs generally offer higher returns, they come with a lock-in period, meaning that you cannot access your funds without incurring penalties until the term ends.
So, what’s the solution? The answer lies in the auto sweep facility. This feature combines the best of both worlds – it allows you to access your funds freely, while also benefiting from the higher interest rates associated with FDs.
In this article, we’ll discuss in detail what an automatic sweep account is, how it works, and the various benefits it offers to account holders.
What is an Auto Sweep Facility?
The auto sweep facility is a banking feature available on savings accounts. It automatically transfers surplus funds above a set threshold from the savings account into a fixed deposit (FD). This threshold is the minimum balance you choose to maintain in your account.
The key benefit is that you can withdraw these funds at any time without penalties or a lock-in period. Using this feature, you earn interest on both your savings and fixed deposit accounts.
But what happens if the balance in your savings account dips below the threshold? In that case, the shortfall amount will automatically be swept back into your savings account, maintaining the optimal balance.
The facility also includes a reverse sweep option. If you need funds beyond your threshold limit, the requested amount will be moved from your FD into your savings account. This process is known as a “reverse sweep.”
Let’s understand how this works with an example. Suppose you open a savings account with an auto sweep for a business facility where the minimum balance required is Rs.10,000. You deposit Rs.50,000 and set a threshold limit of Rs.30,000. The surplus of Rs.20,000 will be transferred to an FD, and both the savings account and FD will earn interest at their respective rates.
If, later on, you need to withdraw Rs.5,000 beyond the threshold, the reverse sweep will transfer this amount from your FD to your savings account. After this transaction, only Rs.15,000 will remain in the FD, which will continue to earn interest at the applicable rate. This option, however, should only be used when absolutely necessary.
What Are the Benefits of the Auto Sweep Facility?
Below are some of the benefits of opting for an auto sweep facility.
Higher Earnings from Interest
For businesses looking to maximize their idle funds, current & savings accounts typically offer lower interest rates compared to Fixed Deposits (FDs). The auto sweep facility automatically transfers surplus funds into FDs, which provide higher returns. This allows businesses to earn interest from both their savings account balance and the higher returns generated by the FD, optimizing idle capital.
Better Liquidity
Maintaining liquidity is crucial for business operations, and the auto sweep facility ensures that your funds remain accessible. If your savings account balance drops below a certain threshold, the facility transfers funds from the FD to your account. This prevents premature liquidation of fixed deposits while ensuring your business always has the cash flow needed for expenses.
No Penalties for Withdrawals
A significant advantage of the auto sweep facility is that it allows businesses to withdraw funds without incurring penalties, unlike traditional fixed deposits. Funds are debited in units, meaning the business only loses interest on the withdrawn portion, providing flexibility without the risk of losing capital.
Flexibility
Many banks offer businesses the ability to define the threshold balance for sweeps and the duration of the fixed deposits. This customization ensures that businesses can tailor the facility to their specific cash flow needs and financial goals, making it adaptable to different business scenarios.
Better Wealth Management
The auto sweep facility allows businesses to efficiently manage surplus funds by automatically transferring idle money into fixed deposits. This ensures that funds are put to work while maintaining the flexibility to access them when needed. It’s a strategic way to grow wealth while maintaining financial discipline.
Customisation
Businesses can set specific parameters for the auto sweep facility, such as threshold balances and fixed deposit tenures, based on their financial goals. Some banks even allow businesses to adjust these settings periodically, making the facility adaptable to changing financial needs.
Helps Build a Separate Corpus
By consistently sweeping surplus funds into fixed deposits, businesses can build a separate reserve for emergencies or future investments. This facility ensures that the funds grow steadily over time without the need to liquidate other assets.
Summing Up
The auto sweep facility is a powerful tool for effective wealth management. It merges the flexibility of a savings account with the better returns of fixed deposits, giving you the best of both worlds. This feature is especially beneficial for business cash management, allowing businesses to grow their reserves while keeping funds easily accessible.
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