Does Your Returns Get Affected by Auto Sweep Accounts?
On the convenience front, auto sweep savings accounts may be particularly great because excess money from these get shifted to fixed deposit (FD) automatically. However, did you know that you could lose out on the interest?
- When your savings account balance surpasses a certain limit, under the autosweep facility, the surplus money is put into an FD. The bank would have decided upon a minimum maturity period for the FD. The threshold can be anywhere between Rs.25,000 and Rs.1 lakh.
- This is the same in the reverse as well. Incase you withdraw more than what is available in the savings account, balance will be taken from the FD automatically. For example, if you have an account at Axis Bank Ltd, and your balance goes below Rs.25,000 in autosweep savings account, the bank will tap into your FD to give you the sum that you require for withdrawal.
- The most important aspect that lures people to autosweep must be the fact that the excess money in a savings account can give you interest much like that of FD (higher than savings account interest). However, the problem is that if you make withdrawals frequently from the FD, you will lose out on interest.
Losing on interest
Frequent withdrawals will result in lower returns no matter how much you put in the auto sweep savings account each month. This is because of two reasons:
- The calculation of the interest is done by taking into account the number of days the FD was with the bank. Thus if the FD tenor was for a year, but you withdrew a sum within 45 days, then the interest applicable will only be for 45 days.
- There is a premature withdrawal penalty that you must pay: usually this is around 0.5-1% of interest payable, which in turn will reduce your returns.
This means that you would have earned more if you kept your money in the savings account.
Further, most banks expect you to have tenors longer than 30 days. If you don’t keep the money for at least 30 days, most banks will offer a much lower interest on the FDs. This means that it is only beneficial for you to go for an FD if your tenor is longer than 30 days. Otherwise you are better off with a savings account. For example, for 30-45-days FDs, ICICI Bank Ltd gives interest of 5.5%. It gives only 4.25% for 15-29-days FDs. So, if you withdraw early, the penalty will be 0.5% for premature withdrawal, and the final rate will be only 5% or 3.75%.
Eye on time
There are two ways that sweeps between the savings account and the FD can happen:
- Last In First Out (Lifo) method: In general, this method will earn better because the first FD swept is permitted to earn interest for a longer period.
- First In First Out (Fifo) method: if you take frequent withdrawals, this method might better
What you should do?
- You must first understand the purpose of an autosweep facility.
- It is only useful if you have money at the end of the month left over after your expenses. Which means you have a large bank balance at the end of the month and you hardly make any withdrawals from the FD. If you do have, autosweep will earn better returns.
- If you are still struggling to make ends meet and have hardly any money at the end of the month, this facility will not be useful for you.
- Do the math to understand what you are getting into: Assuming that you leave the autosweep as it is and earn 8% per annum on a one-year FD, (assuming an inflation of 5% per annum) the real return would be 3%.
- If you fall in the highest tax bracket, Post-tax, this return would be 2%.
- Check the bank’s deposit rates for the relevant period as well as the frequency of your withdrawals. Now deduct the bank’s penalty from the interest rate to understand if the
- Make the most of your money and get the maximum returns by avoiding withdrawing any money from the FD for a few months after their creation (At least 3-6 months).
- If you are a small saver, try to find a bank with lower limits on the autosweep savings account. High thresholds is not what you should go for as a small saver.
