If you are passive Financial planner and your funds in a savings account. This cash might be earning a measly 3.5% per annum, but you are not inclined or don't have the time to shift it to a more lucrative investment option. The sweep facility is for people like you. What exactly is a sweep facility?
What's a sweep facility?
It's a deposit option that banks have been offering for a few years now, and is variedly referred to as a sweep, auto-sweep, flexi deposit or a hybrid scheme. It combines the convenience of a savings account with the high interest rates of a fixed deposit. It's touted by banks as a one-point solution for a typical dilemma. Most people tend to transfer the amount they are unlikely to use in the near future to a fixed deposit or other investments.
To ensure liquidity for emergency needs, they keep a high amount in their savings bank account instead of breaking an FD and incurring a penalty. This prevents them from earning high returns from a fixed deposit. This is where the sweep in, sweep out facility comes in. However, the features of this option are not uniform across banks, which means that you need to take a close look at the fine print before signing up for it.
How it works
If you opt for the sweep facility, either the bank requires you to open an account, which is then linked to an FD, or in a reversal, if you open a fixed deposit, you gain access to a savings or current account. You have to determine a threshold for the balance to be maintained in your savings account at all times. Any amount exceeding this limit gets automatically swept out to the fixed deposit.
However, depending on the bank and even the account type, there could be variations in the sweep out structure. "A bank could allow the customer to determine this limit as long as it is above a certain amount as opposed to it fixing this limit on its own," says Harsh Roongta, CEO, Apnapaisa.com. "Also, the fixed deposit could be in blocks of say, Rs 1,000, rather than a lump-sum deposit."
Some facilities allow the account holder to determine the duration of the fixed deposit instead of the bank doing it for them. Take SBI's Savings Plus account, where the account holder can choose the deposit tenure, ranging from one year to five years. In contrast, in the case of Kotak Mahindra Bank .s Activmoney facility, the balance above a threshold in the current/savings account is transferred to a term deposit with a 181-day tenure. In case of insufficient funds in the account, the money in the term deposit is swept to the former. The sweep in/out has to be in units of Rs 10,000.
As opposed to the sweep out feature, the sweep in option becomes activated when you need to withdraw money or issue a cheque where the amount exceeds or breaches the threshold limit. To make good the shortfall in the savings account balance, the linked fixed deposit is broken and the required amount is swept into your savings account.
"In case of a sweep in, the amount earns an interest that is lower of the original contracted rate and the one applicable for the period for which the deposit was with the bank. The remaining FD amount will keep earning the contracted rate of interest at which the deposit was booked," says Surinder Chawla, head, retail liabilities products, HDFC Bank.
The FD is broken only to the extent of the amount required and usually on a last in, first out (LIFO) basis, which means that you do not lose out on the interest on the entire FD. The LIFO method of transferring funds back into your savings account on demand ensures minimal interest loss, as the amount swept in last is withdrawn first.
"If the deposit is withdrawn (in full or part) prematurely, the amount earns an interest on the applicable rate for the tenure that the money remained with the bank instead of the original contracted rate. We do not levy any penalty as of now," says Puneet Kapoor, executive vice-president, Kotak Mahindra Bank. However, some banks have started charging a premature withdrawal penalty, so study the terms and conditions carefully before opting for this facility.
If you are looking to build a contingency fund worth at least six months' expenses, you need to park your money in a liquid instrument. In such a case, you would do well to consider the sweep facility. On their part, banks have tried to popularise this facility.
"The sweep out contributes around 10% to the total fixed deposits booked in a month and Super Saver contributes around 1% to the total FD base," says Chawla of the HDFC Bank , which offers two such facilities. Adds Kapoor: "Around 44% of our total retail term deposit book is in Activmoney and 30% of our total active retail customer base has opted for this feature." Perhaps it's time you considered the option as well.
Sweep in, sweep out
While the sweep out facility moves specified excess cash from your savings account to your fixed deposit, this money can be swept in whenever there is a shortfall in the savings account.