Whenever you visit a bank to get an account, various accounts are there to choose from. You must always be wondering how to get high interest on savings account in India?
Most common used account types are current and savings accounts. Unfortunately in most cases Current Account does not pay much/no interest. We individuals are more interested in Savings Account used by majority of us.
However have you wondered how good it would be to have a savings account that has very high interest rate like a fixed deposit. Fret not, as there is one product which is a minor variation of savings accounts.
This is a combination of Savings+Fixed Deposit and is called Auto Sweep accounts; in general and the facility is called Auto Sweep Facility.
Few banks in India have started providing Auto Sweep Facility as it has more benefits than a savings account and customers are more likely to deposit since they can get high interest rates.
What is Auto Sweep Account or Auto Sweep Facility?
Auto Sweep Account is a type of high interest savings account or a facility which connects saving bank account with an FD (Fixed Deposit).
In Auto sweep, as the name suggests amount in your account above a certain limit is automatically transferred to fixed deposits and earns a better rate of interest by auto transfer to a Fixed Deposit.
In case, if your account balance goes down, fixed deposits are broken and the part of the amount is shifted back to the saving account. Thus, Auto Sweep account helps you get the optimized benefits of a Savings Bank Account and Fixed Deposits with auto switch of your balance.
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How Auto Sweep & Fixed Deposits differ?
Although both facilities offer you yearly interests; there’s a difference. In Fixed Deposit, you can’t take your deposited amount back before a certain fixed period of time.
Whereas in Auto Sweep, you can withdraw from your fixed deposit linked savings account, which will eventually shift your interest rate to that applicable for savings one. It is not rigid like Fixed Deposit and no manual intervention.
How Auto Sweep Account Works?
We’ll explain it with an example:
John has an account with auto sweep facility enabled. Account’s minimum balance is Rs. 5,000 with a threshold limit of Rs 40,000 and interest on saving bank account is 4%. On 1 August 2019, he has 30,000 Rs in his account.
As John has 30,000 Rs which is less than 40,000 Rs limit. So, the funds remain in saving account and earn regular interest (which varies from 4-5%).
Suppose on 15th of August, he deposits a cheque of 50,000 Rs. So the balance becomes 80,000 Rs which is clearly above limit i.e., 40,000 Rs. Thus, 40,000 Rs will be transferred to a fixed deposit and remaining deposits will continue to be in saving account.
So, for 40,000 Rs in fixed deposits, he will earn higher interest and for the remaining, he will earn the same interest as saving bank account.
If after a few months, he withdraws 30,000 Rs, the fixed deposit remains intact and balance in savings account becomes 10,000 Rs. Now this Rs 10000 is more than the minimum balance of Rs 5000. So no linked FD is broken in Auto Sweep facility.
In case of a further 15,000 Rs withdrawal, bank will allow him to get the amount. But, the fixed deposit that is linked will be broken accordingly and the amount moves to Saving Bank. This is termed as Sweep IN or Reverse Sweep.
Auto Sweep works this way. In simple words, Auto Sweep facility gives you multi-benefits; Saving account and Fixed Deposit both. As you take care of FD, you earn higher commission and you have the flexibility to use your amount in FD.
This makes auto sweep facility a better solution for most of Savings Account and provides you a proxy Higher Interest Savings Account. You need not maintain a manual Fixed Deposit opening and Closing procedure every time.
Can NRI open AutoSweep Account?Unfortunately, the Auto Sweep facility is not available to NRI in most banks like HDFC, ICICI. This is also because interest on FD is available for NRI only if the period is more than one year.
What is Sweep In / Reverse Sweep and Sweep Out
Sweep In/Reverse Sweep: Sweep In or Reverse Sweep is just like cricket 🙂 When money moves in from a FD to Savings Account. Usually triggered when balance in savings account is lesser than withdrawal amount. So money will be swept in from FD to honor the request.
Sweep Out: When excess money beyond a threshold limit is moved to the linked Fixed Deposit. On the excess money moved you can get high interest rate.
Threshold Limit: This is the minimum amount beyond which your money will be moved into linked FD. For eg., if threshold is Rs 40000, any excess amount (usually in multiples of Rs 1000 as per your bank) beyond Rs 40000 is moved into FD and start earning high interest rate from savings.
Who should open Auto Sweep Accounts?
- Salaried who do not wish to lock their savings for long term in Fixed Deposit but would like to avail higher interest rate on Savings account.
- Business persons will find Auto Sweep as sweet feature since practically most current accounts offer 0% interest. You can earn money on you idle balance (as long not too many frequent withdrawals).
- Ideally people who maintain high balance in savings account and do not make frequent withdrawals.
- If you usually maintain 3-4 times your minimum balance required in your savings account, then Auto Sweep facility is for you.
What spoils your High Interest Rate on Savings Account with AutoSweep
Remember that though you have a linked FD with AutoSweep, there is pre-closure penalty for these if terminated before designated period.
For eg., the interest on the FD is based on the number of days it was active. Now if the tenure of FDs in auto sweep facility was one year with 8%/year. You had excess of Rs 1,00,000 in AutoSweep which was swept out.
To this amount you also need to add a pre-closure penalty which is 0.5-1% depending on bank. IndusInd bank does not have pre-closure charges.
Now you immediately withdraw in 3months 4 days. The applicable interest rate for 3 months is 6%, then you will only get 6% on the FD amount. Assume 1% prepayment penalty.
You will get 100000*(90/365)*((6-1)/1000) =Rs 1232.87 as interest.
Another illustration with different example:
So , Auto Sweep facility is not feasible for someone who makes frequent premature withdrawals.
LIFO and FIFO:
This may sound like a foreign term. Simply put this is nothing but
LIFO – Last In First Out. This means the latest FD which was created will be broken during a sweep in.
FIFO – First In First Out. This means the first FD (with earliest opening/creation day) will be broken during sweep in.
So which is better LIFO or FIFO?
In majority of cases, LIFO is the better alternative since you allow some FD to remain longer. This was you earn higher interest on savings account deposit ie., longer duration=bigger interest rate.
In FIFO, you’ll be breaking the Fixed Deposit of Auto Sweep frequently and hence interest earned might be less.
First check and analyze the frequency of your withdrawals below threshold amount. If that is going to be frequent then you’re much better off in Liquid Funds as it earns interest daily.
Banks that Provide Auto Sweep Facility:
In India and other parts of the world, auto sweep facility differs for every bank by name, setting of threshold limit, tenure of Fixed Deposit, making of Fixed Deposit (auto/manual), breaking of Fixed Deposit and more.
Here are some of the banks with Auto Sweep facility:
State Bank of India – Multi Option Deposit Account
Axis Bank – Encash 24
Bank of India – BOI Savings Plus Scheme
HDFC Bank – Sweep In Facility
United Bank of India – Bonanza Saving Scheme
Auto Sweep facility has made it easier to earn higher interest but it has got some downsides, too. Like some banks charge a penalty if Fixed Deposits are broken before a specific duration, and the interest earned through FD is taxable.
Shortly, you can earn higher interest only if you get in-depth details for the facility before you make a choice. SO if you’re someone who does not make frequent withdrawals , go ahead and open Auto Sweep Account with Auto Sweep Facility to get higher interest on savings account.
Do you know about this option before? Will you make use of this option in Savings Account? Comment and let us know your opinion.