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Are you someone who keeps a substantial amount of savings in the bank? If so, then you might want to consider an auto sweep account which combines your savings account with a Fixed Deposit (FD). It offers a great opportunity to earn higher returns on your savings account balance without any additional effort. Any surplus amount above a predetermined threshold is automatically converted to an FD, which typically offers a higher interest rate.
While this might seem like a big opportunity to maximise your savings’ value, you may wonder whether your returns get affected by auto sweep accounts. It depends on factors such as the interest rate offered, FD account tenure, minimum balance required to earn interest, and withdrawal frequencies. Let’s get into these factors in more detail.
- Savings account balance
The auto sweep feature can significantly improve your returns if you maintain a high balance in your savings account. However, if your balance frequently stays near the threshold, the funds getting swept into an FD might not substantially affect your earnings.
Thus, regularly assess your savings account balance and the frequency of auto sweeps to gauge the impact on your overall returns.
- Interest rates on FD
The interest rate offered on the FD portion of the auto sweep account is a key factor that impacts your returns. Different banks offer varying interest rates, and these rates can fluctuate over time. To optimize your returns, it is important to compare the FD interest rates offered by different banks and choose the one with the highest rate.
To optimise your returns, actively compare the FD interest rates different banks offer. This enables you to make a calculative decision and select the bank offering the most competitive interest rate. This step ensures that your idle funds earn the highest possible returns within the safety and stability of an FD, and you leverage the facility of auto sweep in savings accounts to the maximum.
- Threshold amount
The threshold amount is the minimum balance required to start the auto sweep process. The threshold amount varies from bank to bank. The excess amount is automatically moved to the FD when the balance exceeds this threshold.
If the threshold is set too high, a considerable portion of your funds might remain in a low-interest savings account, missing out on the benefits of higher returns from an FD. If the threshold is too low, the auto sweep may occur more frequently, leading to potential disruptions in your financial planning and liquidity needs.
Choose an appropriate threshold amount to maximise the returns from your auto sweep savings account. Ideally, it should align with your average account balance and financial goals.
- Partial withdrawal
In most auto sweep accounts, the funds remain locked in the FD for a specific period (usually 180 days, but it can vary among banks). These accounts come with the advantage of no penalties on premature withdrawals from the FD. While this provides liquidity to the account holder, it can also impact returns. The longer you keep the funds in your FD, the higher the interest rate it accrues. Premature withdrawals reduce the final returns on the FD, thus, it’s advisable to plan and avoid making frequent transactions.
For emergencies or urgent financial needs, it’s better to open a savings account online exclusively for keeping emergency funds.
To maximize the benefits of auto sweep accounts, it is important to choose the right threshold amount and understand the terms and conditions of the account. You should also make sure to have a separate savings account for your emergency funds, so that you do not have to make premature withdrawals from your FD.
Here are some additional tips for maximizing the returns from auto sweep accounts:
- Set a realistic threshold amount: The threshold amount should be set based on your average daily balance and financial goals. A good rule of thumb is to set the threshold amount to the amount you need for your monthly expenses.
- Review your threshold amount regularly: Your financial situation may change over time, so it is important to review your threshold amount regularly and make adjustments as needed.
- Avoid making frequent withdrawals: Auto sweep accounts are designed to help you earn higher returns on your savings. Frequent withdrawals can disrupt this process and reduce your returns.
- Compare FD interest rates: Different banks offer varying interest rates on FDs. To maximize your returns, it is important to compare the FD interest rates offered by different banks and choose the one with the highest rate