You can either opt for a sweep-in account or use an overdraft facility.
Fixed deposits (FDs), a risk-averse investors’ investment avenue of choice, has become more attractive after the recent interest rate hikes by banks. However, the choice of an FD is not a simple one, given many variants.
There are choices between regular FDs, recurring deposits, flexi deposits and sweep-in deposits. Sweep-in deposits are convenient because they are linked to your savings account. An accountholder can also take advantage if there is a temporary surplus and are unsure of the period for which the amount will stay in the account.
“Typically, any amount over and above double your minimum average quarterly balance, is ‘swept-into’ a fixed deposit in pre-specified multiples. However, this would be different for each bank,” says S Govindan, GM-personal banking, Union Bank of India.
Sweep-in deposits: The savings account balance would earn you interest at 3.5 per cent per annum.
The interest rate attracted by the sweep-in deposit would depend on the tenure of the deposit. So, say your account balance is Rs 20,000 and the amount in your sweep-in deposit is Rs 10,000, held for six months. While, your account balance of Rs 20,000 will attract interest at 3.5 per cent, the interest earned by your sweep-in deposit amount of Rs 10,000 would depend on the interest being offered by the bank on a six-month sweep-in deposit.
The interest rates offered on sweep-in deposits are usually lower than the regular fixed deposits. For instance, Kotak Mahindra Bank offers interest on 1-year, 1-day sweep-in deposits at 6.6 per cent. But, for the same period, the bank offers interest at 8 per cent on standalone deposits.
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Most customers opt for a sweep-in facility because of the liquidity it offers. If you draw a cheque on the account and the balance is insufficient to clear it, the bank pulls the deficit money from the deposit. The rest of the amount continues to be in the deposit.
According to K V S Manian, group head - retail liabilities and branch banking, Kotak Mahindra Bank, “A temporary surplus may be invested in a sweep-in deposit. But, if one is sure about the investment tenure, he/she must opt for a standalone FD,” says Manian.
But sweep-in deposits has drawbacks. Apart from lower interest rates, some banks offer this facility for a limited tenure. For example Axis Bank’s sweep-in deposit product, known as Encash 24, has a maximum maturity period of 181 days (about six months), earning annual interest of 6.25 per cent (or close to 3.13 per cent for six months) for deposits below Rs 15 lakh. On maturity, the bank automatically renews the deposit for the same tenure.
You can make your standalone FD, that fetches higher interest liquid by opting for overdraft facility.
Overdraft: This facility is offered against the standalone fixed deposit. It is a loan, wherein bank charge 1-2 per cent more than the interest rates offered to you on your fixed deposit.
If you opt for this facility, banks transfer an amount, 75-80 per cent of the fixed deposit, in to your savings account. The overdraft is valid for the entire term of the deposit.
Suppose, you are looking at depositing money for short-term goals such as, say payment of your insurance premium after three months or your child’s school fees after six months. If you keep the money in a sweep-in deposit, there is a risk that the money may get used if your savings account balance dips. Instead if you invest the amount in a regular FD, the funds are locked. In addition, could even attract a higher interest rate depending on your bank.
In case you want to avoid OD and paying interest to bank, you can also opt for fixed deposit that allows partial withdrawal. This is bank-specific and investors must check if their bank gives this option.
Part withdrawals of the fix deposits is possible for several private and public sector banks such as Axis Bank, ING Vysya, Kotak Mahindra Bank, Punjab National Bank and others in pre-specified multiples.
