Linking your FDs to savings account? Ensure you gain

Tags: Banking

Sweep-in facility can give you higher returns but know the pitfalls

Optimising returns from your funds parked in banks is no longer a simple affair of opening a fixed deposit (FD). The sweep-in feature of funds from FDs to savings account is also an old feature, been around for more than 10 years. However, its utility has become more pronounced now, given the increased complexities and multiple choices in bank offerings.

Sweep-in facility is given by most deposits on FDs and you can opt for it for any number of FDs. In this facility, while making withdrawals, issuing cheques or transferring money online from your savings account, if your balance falls below zero, then the relevant amount from one or more of your linked-in FDs gets pre-maturely withdrawn and transferred to your savings account to enable the transaction.

When to use it? Savings accounts are generally used to manage immediate and short-term expenses and given the unpredictability of expenditure, most bank customers end up keeping large sums in it. But banks give only 4 per cent interest with the exception of a couple of banks, which are now offering 5-7 per cent.

For example, a bank customer maintains around Rs 1,00,000 in her savings account, net of credits and debits, much of the time and her past activity record suggests the balance goes below Rs 50,000 in only two to four months in a year. In this case, she can earn higher interest on her money by keeping only Rs 25,000 in her savings and parking the rest in one or multiple FDs of varying tenures and interest rates and opting for the sweep-in facility in each of them. Multiple FDs with this option, are swept-in on a first-come-first-served basis with the one opened the first being broken to sweep in funds to savings.

Be sure net returns from FD are higher: A strategy to fetch higher returns, using sweep-ins, can backfire, so be careful. Funds swept-in from FDs to savings are treated as premature FD withdrawals and attract the relevant penalty rate ranging from nil to 1 per cent. For instance, HDFC Bank charges 1 per cent penalty, while Yes Bank charges no penalty on premature FD withdrawals. Moreover, the interest your FD actually earns at the time of premature withdrawal, is the rate for the time period of FD open date to premature withdrawal rate. This can be lower.

Take the example of a HDFC Bank customer opening a six to 12 month FD at the bank’s current interest rate of 7.75 per cent and opting for the sweep-in option. After exactly five months, funds from this FD is swept in to her savings account when the latter balance falls below zero. A five-month FD at the bank pays 7.25 per cent. The swept-in amount will, therefore, earn only 6.25 per cent (7.25 per cent minus 1 per cent penalty). Such a customer would be better having a pure savings account with the sole bank that is paying 7 per cent interest on savings on balances above Rs 1,00,000.

So, it is important ensure that the net returns on your swept-in FD amount is always higher than 4 per cent or the savings interest rate.

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