Demystifying ‘sweep account’
In this article Arnav Pandya tries to demystify sweep accounts which are preferred by many investors, who are not able to regularly monitor their funds, to earn a higher rate of return.india Updated: Aug 04, 2008 22:47 IST
Many investors prefer to let the bank undertake some part of their investing activities. This is especially true with sweep accounts where the money in a savings account gets transferred to a fixed deposit at regular intervals enabling the investor to earn a higher rate of return. This is a good option for those who are not able to regularly monitor their funds and hence the process becomes easier for them. However one needs to consider some important points while using a sweep account.
There is a specific amount that is fixed as a minimum amount for the account. Only when the balance goes above this figure that the sweep will come into effect. The amount that is fixed under this head becomes an important factor because this will determine the extent of the fixed deposits that will be created.
If a person does not have high amounts of funds in the account and assume that the threshold limit is fixed at say Rs 25,000 then the benefit may not be much. The flip side to such a situation is also possible where the threshold limit is low and large amounts lie in the bank account. The ideal situation is where the investor is given a choice for the limit for sweep facility, but this will come only after certain conditions are fulfilled.
An individual must also check the rate that will be earned by him or her. The deposit will be created for a specific period and the rate applicable for that period will be the rate earned by the investor. This might not always be the best situation because the rate applicable for specific time deposits might be far higher. This can result in a situation where the investor might just be better off by choosing their own deposit time period and making the investment because of difference of rates. This will not have the same operational facility as a sweep account and will be valid only when there is a large difference in the rates. Otherwise the convenience will outweigh the other factors. The other factor is the money coming back to the savings account and this has to be seen for the impact that it has on the earnings rate. Depending upon the conditions fixed in the scheme there will be a specific rate for the break up of the deposits and they need to be understood well.
n Sweep accounts allow investors to move away from regular decision-making
n The amount is swept from a savings account to a fixed deposit
n This takes place when the balance crosses a threshold limit
n The rate applicable to the deposit is also important
n At the same time the manner of calculation of interest on deposits broken is also vital.