Does Your Return Get Affected by Auto Sweep Accounts?

Losing Interest

Frequent withdrawals will result in lower returns no matter how much you put in the autosweep savings account each month. This is because of two reasons:

• The calculation of the interest is done by taking into account the number of days the FD was with the bank. Thus if the FD tenor was for a year, but you withdrew a sum within 45 days, then the interest applicable will only be for 45 days.
• There is a premature withdrawal penalty that you must pay: usually this is around 0.5-1% of interest payable, which in turn will reduce your returns.

This means that you would have earned more if you kept your money in the savings account.

Further, most banks expect you to have tenors longer than 30 days. If you don’t keep the money for at least 30 days, most banks will offer a much lower interest on the FDs. This means that it is only beneficial for you to go for an FD if your tenor is longer than 30 days. Otherwise you are better off with a savings account.

Keeping an Eye on Time

There are two ways that sweeps between the savings account and the FD can happen:

• Last In First Out (Lifo) method: In general, this method will earn better because the first FD swept is permitted to earn interest for a longer period.
• First In First Out (Fifo) method: if you take frequent withdrawals, this method might better

What Should You Do?

1. You must first understand the purpose of an autosweep facility.
2. It is only useful if you have money at the end of the month left over after your expenses. Which means you have a large bank balance at the end of the month and you hardly make any withdrawals from the FD. If you do have, autosweep will earn better returns.
3. If you are still struggling to make ends meet and have hardly any money at the end of the month, this facility will not be useful for you.
4. Do the math to understand what you are getting into: Assuming that you leave the autosweep as it is and earn 8% per annum on a one-year FD, (assuming an inflation of 5% per annum) the real return would be 3%.

1. If you fall in the highest tax bracket, Post-tax, this return would be 2%.
2. Check the bank’s deposit rates for the relevant period as well as the frequency of your withdrawals. Now deduct the bank’s penalty from the interest rate to understand if the
3. Make the most of your money and get the maximum returns by avoiding withdrawing any money from the FD for a few months after their creation (At least 3-6 months).
4. If you are a small saver, try to find a bank with lower limits on the autosweep savings account. High thresholds is not what you should go for as a small saver.

Autosweep is best suited for people who do not fancy high risks when it comes to savings. It is also an ideal facility for businesses which get no interest on their current accounts. However, think well before you go for it: if you think that you will need to make frequent withdrawals, then avoid going for this facility.