Think before you sweep

The sweep facility is often suggested as a cool hack to earn interest at a rate higher than that offered for regular savings accounts. However, it is not so straightforward and there are even cases where the sweep FD (fixed deposit) earns a lower interest rate than savings accounts. Should you apply for this facility? Will it suit your needs? Read on to find out.

Brass tacks

A quick primer first. There are two legs to the sweep facility — sweep out and sweep in. When the balance in your savings account crosses a threshold value, the excess will be automatically booked as an FD, and this FD will earn interest at rates applicable for regular FDs. This is sweep out. However, there is a minimum principal requirement for the FD. Only if the excess crosses this minimum principal requirement, an FD will be booked. For example, the threshold value in case of SBI’s Multi Option Deposit and Kotak Mahindra Bank’s ActivMoney is ₹25,000. However, the minimum principal requirement in case of SBI is ₹10,000 and in multiples of ₹1,000 and in case of Kotak, the minimum is ₹5,000 and in multiples of ₹5,000.

As you transact from your savings account, the balance could get lower than the threshold value. In such a case, one of the sweep FDs will be automatically closed (fully or partially as the case may be) and its principal and interest will be credited to the savings account. This is sweep in. However, the FDs will be closed only when the shortfall exceeds a certain limit. For instance, ICICI and Kotak close sweep FDs only in multiples of ₹5,000, meaning only if the shortfall (difference between threshold value and savings account balance) is ₹5,000 or more, an FD will be closed. Sweep in in most banks works on a ‘last in first out’ (LIFO) basis – sweep FDs booked late will be the first ones to be closed.

Kotak’s Edge Savings account with ActivMoney sweep facility is illustrated.

The good part

As most banks offer ATM facility (money in sweep FDs can also be withdrawn in an ATM), it provides the flexibility to access funds at any time. This is much beneficial for certain seniors who may not be digitally savvy enough to operate a mobile app to close an FD (not having sweep facility would mean booking FDs manually).

As most banks operate the sweep facility on a LIFO basis, it removes the human error of premature withdrawal of long outstanding/ high yielding FDs, in times of emergency.

Banks also offer the option to choose the tenor of the sweep FDs, enabling choosing that tenor which has the highest interest rate. 0

The coolest of all benefits is that when a withdrawal triggers closure of a sweep FD, the sweep FD will be closed only to that extent enough to meet the shortfall between the threshold value and account balance. The rest of the FD keeps earning interest. Refer to transactions on day 40 in the accompanying table.

The not-so-good part

When sweep FDs are prematurely withdrawn (swept in), banks charge a penalty, which will be a deduction of 0.5-1 per cent from the relevant interest rate applicable. For instance, the penalty in case of HDFC’s SavingsMax account is 1 per cent. However, there are other banks such as Kotak that do not charge penalty on premature sweep ins.

Let’s simplify this with an illustration. Say, a HDFC SavingsMax customer has opted one year as the tenor for sweep FDs. The interest rate applicable on one-year FDs is 6.6 per cent. Assume he withdraws money that triggers premature closure (sweep in) of a sweep FD that has been outstanding for 20 days.

First, this FD will earn interest at rates applicable for FDs with tenor of 20 days and not at 6.6 per cent. The rate applicable for 20-day FDs is 3 per cent. A penalty of 1 per cent applies on this and the customer will end up earning interest at 2 per cent only, which is lower than the rate applicable for normal savings accounts, which is 3 per cent in this case.

Thus, sweep facility wouldn’t make sense for savings accounts that have frequent debits.

Another disadvantage to be noted is the high threshold that may have to be maintained to trigger sweep outs. In case of HDFC, the threshold value is set high at ₹1 lakh and the minimum principal requirement for sweep outs is ₹25,000. That could mean that funds up to ₹1.25 lakh will stay idle in your savings account, which could have earned more interest had the trigger been lower. This matters more when this account is only a second account or is not the one from which you regularly withdraw for your expenses.