Advantages of FD | Sweep-in FD vs FD Overdraft: Which is better and why? Sweep-in FD vs FD Overdraft: Which is better and why?
Fixed Deposit (Photo – iStock)
- In FD overdraft, you have to pay about 1% to 2% more interest than the interest earned on your FD.
- In sweep-in FDs, interest will be payable only on the amount used.
You may often come across a situation when you need money temporarily but you do not want to take a loan for it. If you have kept the money in the form of a fixed deposit, then you can consider it to raise the required amount at the time of need as it usually carries a lower interest rate than a personal or business loan. One way is to break that FD to meet your requirement, but since your requirement is for a short period of time, you may not want to sacrifice the interest rate you get during lock-in and keep your interest rate at bay. Don’t want to risk the FD scheme. So, what other option can you have in such a situation?
Sweep-in FD and FD Overdraft are two such products where you can meet your money needs instantly without breaking your FD. But both products have their advantages and disadvantages, and knowing about them can help you choose the right one for you.
What is Sweep-in FD?
You can often find surplus funds in your savings or current accounts, for which you usually get zero or less interest amount on your deposited funds. To get higher interest rate, you can opt for sweep-in FD in your bank account. Under this option, you have to give a standing instruction to your bank that whenever the balance in your account crosses the limit set by you, that excess amount will be automatically converted into FD. The rate of interest on such deposits depends on the tenure for which you have invested but it is usually higher than the interest rate available in savings account. The tenure of sweep-in FDs ranges from one year to 5 years. Whenever you withdraw an amount in excess of the balance in your Savings/Current Account, that excess amount goes from your sweep-in FD to your Savings/Current Account without affecting the entire FD.
What is FD Overdraft?
Under this facility, overdraft is allowed by the bank by imposing a lien on your FD. Banks usually allow overdrafts up to 90% of the value of your FD. The interest rate on FD overdraft is around 1% to 2% higher than the interest rate on your FD. For example, suppose the interest rate of the FD is 6% per annum. In such a situation, about 7% to 8% interest can be charged by the bank on the facility of OD. Interest on FD overdraft is calculated on a daily basis. This means that if you withdraw money from OD for ten days, the bank will charge you only ten days interest and you will continue to get interest on the entire FD amount at the pre-determined rate.
Which of the two options is more advantageous from the point of view of interest rate?
In FD overdraft, you have to pay around 1% to 2% more interest than the interest you get on your FD. Whereas, in a sweep-in FD, you only have to pay interest on the amount utilized which is equal to the interest applicable on the FD for that period, i.e. you do not have to pay any additional interest. Later, you can deposit that amount again and continue earning interest by maintaining your investment for the desired period. FD overdraft is beneficial for investors who want to make a lump sum investment at an attractive interest rate offer. Sweep-in FDs are beneficial for investors who usually have a large amount of money for a short period of time.
Which of these options encourages one to save more?
Overdraft availed against FD gives you the facility to meet your money requirement temporarily without breaking your FD. On the other hand, the sweep-in FD option encourages you to deposit more money in your bank account so that you can earn higher returns on it. In short, the sweep-in FD option encourages fresh savings, while your existing savings are protected against the overdraft secured against the FD.
Which of the two should you choose?
Overdraft on FD is a simple product which can be easily understood by most of the investors. In this, the user should return the used amount as soon as possible so that the interest earned is not lost. On the other hand, understanding sweep-in FDs can be a bit complicated for some investors. With the change in key policy rates by the Reserve Bank of India, the interest slab on sweep-in FDs may also change. It may also be a bit difficult for you to understand how interest is calculated on your sweep-in FD when you make multiple withdrawals and deposits.
(The author of this article is Adil Shetty, CEO, BankBazaar.com)
(Disclaimer: This information is being given on the basis of expert reports. Markets are subject to risks, so take your own advice before investing.) (This article is written for informational purposes only. It is for investment purposes only.) should not be construed as financial or other advice)
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