It is gratifying to see a plush savings bank account balance, who does not like the sheer comfort of having a large liquid cash base? But, you need to be aware that money left idle will never grow. People often accumulate a lot of money in their savings account, earning meagre 4% annual interest. For your savings bank account to truly work for you, you need to roll it to generate more interest.
Many of us do not know a lot about banking product investments, even if we do know about buying shares, debentures, gold, or even property. There could be many reasons for this – sometimes we are so caught up in the larger and more complicated investments that we fail to see the simpler options that are right in front of us. Sadly, because of this, the amount in your savings bank account remains idle.
Among the simpler options that allow your money to work better for you monetarily, there is one that can be incorporated easily in your savings account. This is called the ‘auto-sweep' facility – a service that uses the amount lying in your savings account to generate better value.
What is the auto-sweep facility?
The auto-sweep facility is a combination of savings account and FD or fixed deposit account. It carries with it the advantage of both facilities. With an auto-sweep account, your savings account is linked to a fixed-deposit account and a monetary limit is defined. Whenever the amount in the savings account crosses that defined limit, the excess money is transferred automatically into the fixed deposit. This way, your savings account balance can earn a higher rate of interest than it would have lying in a plain-vanilla savings account.
How does auto sweep work exactly?
You can define an upper limit for the amount you want to keep in your savings bank account, which is known as the threshold limit. Whenever your balance is higher than your threshold limit, the surplus amount will be transferred to the FD account. The technical term for this process is ‘sweep-in'. Each of the accounts earns its own interest. However, the advantage of a sweep facility comes into play here – transferring into an FD does not mean that the amount loses its liquidity. Whenever you require money from your account that is in excess of your threshold limit, the required amount will be transferred back to your online savings account from your FD account – like the cricketing term, this is known as the ‘reverse-sweep'.
Explaining with an example will make it clearer – Let’s say that you have opened a savings account with an auto-sweep facility and the minimum balance required is Rs. 5,000. You have deposited Rs. 30,000 and fixed a threshold limit of Rs. 10,000. The excess Rs. 20,000 will be transferred to your FD. Both accounts will earn their respective interest rates. In this case, if there is a reverse-sweep, the transferred money will not receive the FD interest rate. Thus, the banks’ advice to sweep account holders is not to make frequent transactions when an auto-sweep facility is attached to your account.
This facility gives you the flexibility of a savings bank account, and the lucrative interest rate of a fixed-deposit account. Salaried people who do not want to lock-in big amounts in FDs can use this facility. It is also a great way to keep earning interest on your ‘surplus’ money without locking it into a rigid financial instrument. Incorporating this service into your savings bank account helps your account to earn a little extra, and who does not like that?
Disclaimer: Copyright Kotak Mahindra Bank Ltd.
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