What is the Sweep Account?
A sweep account is a combination of two types of accounts i.e. the Savings Account and Fixed Deposit Account. For the Sweep account, the customer need not open a new account rather the existing saving account is converted to the Sweep Account on the request of a customer or the account holder.
Sweep Account also is known as checking account automatically transfers the excess amount of your account into a Fixed Deposit Account. Similarly, when the customer withdraws money from the account then the fixed deposit amount automatically transfers back into your savings account. The whole process happens in the background and it does not affect your saving account operation. Sweep Account tries to minimize the idle cash by consistently investing it into a higher investment earning option at the end of each business day.
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How Sweep Account Works
A commercial checking account is linked with an investment account, such as a money market account or stock fund with the help of a sweep account. A minimum balance is targeted for its main checking account. It automatically keeps checking the balance and transfers funds to or from the investment account as and when needed.
For example, you opened a sweep account at your bank and set the sweep target at $2,000.Whenever the balance of checking account exceeds $2,000, the bank would automatically transfer the amount over $2,000 into an account with a higher interest rate, and when it dips the level of $2,000 the funds are swept back from an investment account to checking account.
Sweep accounts allow small businesses that depend on daily cash flow but want to get higher returns on cash that might otherwise sit idle in commercial checking accounts. It makes a lot of sense for small businesses that don’t have the time or capital to reap the benefits of more profitable investments.
Benefits of Sweep Account
Benefits to Customers
- The customer gets the benefit of Fixed Deposit by maintaining the liquidity in your savings account.
- Savings account interest rate is around 4 % while the FD interest rates are nearly double. If you have a huge balance over the checking amount balance then most of your saving account balance will earn fixed deposit interest.
- Sweep accounts are very convenient as the sweep facility itself opens the Flexible FD account for you when the balance exceeds, and when the balance gets low the deficit money automatically comes back into the savings account.
- This account benefits the companies who need tax-advantaged benefits.
- This account mostly benefits the customer who has huge cash in the savings account and the withdrawal is minimum.
Benefits to Banks
A question may arise that how the banks are benefitted if they offer higher interest rates. The answer to this is that if the bank offers a sweep facility, they can accumulate a huge deposit in their fixed deposit account because many rich people prefer to invest their money in mutual funds.
The fees charged on the sweep account facility varies from banks to banks. Some banks charge a flat fee while some charge a percentage on yields.
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Name of Sweep Account: Different banks use different names for this account. Like, Savings Plus Account, Flexi Fixed Account, Auto Sweep, etc.
Threshold Limit: The banks have some threshold limit which is targeted by banks like 10,000 or 25,000 but a customer can go below that also.
Tenure of FD: There are different options to select the tenure. It varies from 1 to 5 years. In case you break the FD before the tenure then the interest rate will be given on the holding period.
Method of Liquidation: Different methods are adopted by Banks when you break the FD. Some use LIFO (Last In First Out) where the FD which was created last will be transferred to Savings Account or FIFO (First In First Out) where the FD which was created first will be transferred to Savings Account.
Types of Interest: The interest rates offered by some banks may be simple interest as against compound interest that is offered in FDs.
Pre-Closure Penalty: Many banks charge a pre-closure penalty on breaking FDs before maturing time. It varies from bank to bank.
Author: Trushali Hindocha
About the Author:
Trushali completed her graduation in Computer science and engineering, she has worked as Associate Consultant in Atos Syntel for 18 months. She is currently pursuing MMS in Finance from KJ Somaiya Institute of Management Studies and Research, Mumbai. She is also well acquainted with Tableau and programming languages like Python and R for Data Analytics.