A fixed deposit typically offers higher rates of interest compared to a traditional savings bank account. However, one of the primary drawbacks of a fixed deposit is that it is not as flexible as a savings bank account.
For instance, you cannot access your funds that are locked in a fixed deposit account before the end of its tenure unless you prematurely close it. This is not the case with a savings bank account.
In a bid to solve this particular drawback of fixed deposits, banks introduced the sweep-in fixed deposit. It is an innovative product that combines the key characteristics of a fixed deposit and a savings bank account.
In this article, we are going to explore what is a sweep in fixed deposit, how it works, its key features, and the benefits it offers.
What is a Sweep-In Fixed Deposit?
The fixed deposit sweep-in facility, also known as a sweep-in fixed deposit, is a hybrid financial product that offers investors the stability and high returns of a fixed deposit with the flexibility of a savings bank account.
A sweep-in fixed deposit is linked to a savings or current bank account. If the balance in the bank account is over a certain threshold, the excess funds are automatically transferred to the fixed deposit account that carries a higher sweep-in FD interest rate. The leftover funds in the savings bank account, meanwhile, can be used for day-to-day transactions.
How Does a Sweep-In Fixed Deposit Work?
Let us now try to understand how a sweep-in fixed deposit actually works with the help of a hypothetical example.
Assume you have a savings bank account offering a rate of interest of just 4% per annum. In a bid to maximise returns on the idle funds in your savings account without sacrificing liquidity, you opt for the fixed deposit sweep-in facility.
The bank opens a new sweep-in fixed deposit account and links it to your savings bank account. At the time of setting up the FD, you establish a minimum fund threshold of ₹50,000 for your savings bank account.
Now, whenever the balance in your savings account goes over ₹50,000, the excess funds are automatically ‘swept into’ the linked fixed deposit account, where it earns interest at a higher rate, say 7% per annum.
At any point in time, if the balance in your savings account falls below ₹50,000, funds are automatically transferred back from the fixed deposit to your account to maintain the minimum threshold you set.
The interest on the funds in the sweep-in fixed deposit is calculated based on the duration for which the funds remained in the account.
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Key Features of a Sweep-In Fixed Deposit
A sweep-in fixed deposit has several key features that make it a unique investment option. Here is a quick overview of some of its characteristics.
1. Linking of Bank Account
Unlike traditional fixed deposits, sweep-in fixed deposits are linked to active savings or current bank accounts.
2. Automatic Fund Transfers
The fund transfers to and from a sweep-in fixed deposit are fully automated and executed based on the minimum threshold limits you set at the time of deposit creation.
3. Flexible Threshold Limits
With a sweep-in fixed deposit, you get the freedom to set the threshold limit for your savings bank account as per your needs. However, it is important to note that most banks usually have a minimum threshold limit of ₹25,000.
4. Partial Liquidation
Whenever the funds in your savings bank account drop below the threshold, only the amount that is required to bring it back up to the set limit is transferred from the sweep-in fixed deposit. The rest of the funds in the FD will continue to remain untouched, earning you more interest due to the higher sweep-in FD interest rate.
5. Customisable Tenures
You also get the flexibility to choose the tenure of the sweep-in fixed deposit. Usually, banks offer tenures ranging from one year to five years.
Benefits of a Sweep-In Fixed Deposit
Understanding the various benefits of a sweep-in fixed deposit can help you determine whether it is the right investment for you. So, here are some of the key advantages of this unique investment option:
1. Better Returns
Sweep-in FD interest rates are on par with the rates offered by a traditional fixed deposit, which tend to be much higher than what a savings or current bank account typically offers.
2. Enhanced Liquidity
Sweep-in fixed deposits ensure that sufficient funds are always readily available in your bank account for regular day-to-day transactions and emergencies.
3. Convenience
Once a sweep-in fixed deposit is set up, the fund transfers happen automatically based on the preset limits and rules. This completely eliminates the need to manually intervene to manage your cash flows.
4. Efficient Cash Management
By instantly transferring funds that are in excess of the set threshold limit, sweep-in fixed deposits always make sure that your funds are efficiently utilised at all times.
5. Cost-Effective
Banks do not levy any penalty or charges when funds are transferred out of your sweep-in fixed deposits and into your bank account, which is almost always the case when you prematurely close a traditional FD. This makes the fixed deposit sweep-in facility a more cost-effective investment option.
Differences Between Sweep-In Fixed Deposits and Regular Fixed Deposits
A sweep-in fixed deposit differs from a traditional FD in more ways than one. Let us look at some of the key points of distinction between these two types of fixed deposits.
| Particulars | Sweep-in Fixed Deposit | Regular Fixed Deposit |
| Bank Account Requirement | A bank account is mandatory to open a sweep-in fixed deposit. | A regular fixed deposit can be opened without a bank account. |
| Liquidity | A sweep-in fixed deposit offers better liquidity as funds can be automatically transferred back to the savings account when needed. | A regular fixed deposit is not very liquid. Accessing the funds locked in an FD before the tenure expires can be challenging. |
| Automation | Fund transfers to and from a sweep-in fixed deposit are fully automated. | A regular fixed deposit requires manual intervention for premature withdrawals. |
| Minimum Thresholds | A sweep-in fixed deposit has higher minimum thresholds. | A regular fixed deposit has a much lower minimum investment limit compared to sweep-in FDs. |
| Penalties | A sweep-in FD does not levy any penalties for withdrawals. | A regular fixed deposit will levy a penalty for premature withdrawal. |
Conclusion
The fixed deposit sweep-in facility is a unique investment option that offers a smart solution for the liquidity restrictions of a traditional FD. By automating fund transfers, sweep-in fixed deposits provide a seamless and hassle-free way to maximise returns without sacrificing liquidity.
However, as with any financial product, you must make sure to thoroughly understand the various terms and conditions associated with sweep-in FDs before investing. Remember to consider factors such as minimum balance requirements, sweep-in FD interest rates, and any associated fees. This way, you can make well-informed decisions without compromising on your financial goals.
FAQs
Is it mandatory to have a bank account to open a sweep-in fixed deposit?
Yes, for the sweep-in facility to work seamlessly, you must have an active savings or current bank account.
Are sweep-in FDs also covered by deposit insurance?
Yes, sweep-in FDs are covered by the Deposit Insurance and Credit Guarantee Corporation (DICGC) up to ₹5,00,000.
Can I open multiple sweep-in fixed deposits?
Yes, you can open multiple sweep-in fixed deposits as long as you have multiple bank accounts. However, keep in mind that only one sweep-in FD can be linked to one bank account at any given time.
Which of the two offers better interest rates: a sweep-in fixed deposit or a regular fixed deposit?
The sweep-in FD interest rates of most banking institutions are very similar to those of their regular fixed deposits.
Can I prematurely close a sweep-in fixed deposit?
Yes, you can prematurely close a sweep-in fixed deposit. However, you must note that the bank may levy a penalty for closing the deposit before the end of its tenure.