The Auto Sweep Facility: A Quick Explainer

The auto sweep facility is a banking feature built to help businesses and individuals make the most of the money in their bank accounts – current and savings alike.

The idea behind this piece of banking genius comes from the fact that nobody (and we mean, nobody) has the time or patience to check their bank account every day, transfer money over the desired threshold into an FD (or some other kind of deposit), or withdraw money from another deposit to maintain a fixed balance in the current or savings account.

Banks decided to change the game by bringing automation into the picture. And just like that, the auto sweep facility was born.

Without further ado, let’s dive into this tell-all piece about the auto sweep, simplify some jargon, and learn how this facility works for you.

[Read more: Business Account Checklist: Meaning, Types and Features?]

What is Auto Sweep & How Does It Work?

The auto sweep facility, when enabled, transfers money from your account in excess of a stipulated balance to a deposit that gives you a greater return – usually a fixed deposit (FD). This is called sweep-out.

When the balance in your account falls below the stipulated threshold, the amount of the shortfall flows back into your account. This is called sweep-in.

This process of sweeping the money into or out of your account happens at the end of each working day – ensuring that the optimum balance is maintained in your account. At the same time, all your excess cash gets the highest return from a safe fixed deposit.

                          [Read more: Top Finance Questions Every Founder Has!]

Simplifying the Jargon

Here are a few terms you should be familiar with before availing of the auto sweep facility:

• FD tenure or period: It is the duration of the fixed deposit, that is, the time for which the FD has been created. Banks might offer only a 1-year deposit as part of the auto sweep facility. Some banks, however, provide a flexible tenure for Fixed Deposits.
• LIFO or FIFO: The excess amount swept out of your account is invested in FD units, each of them typically broken into small denominations. The bank may follow the FIFO (First In First Out) method or the LIFO (Last In First Out) method to liquidate FD units to maintain the stipulated balance in your account.In the LIFO system, the bank will liquidate the FD units invested in which you invested most recently, and the amount will be transferred to your account. The bank will liquidate the FD units created the earliest in the FIFO system.
• Pre-closure penalty: The penalty charged for withdrawing from a Fixed Deposit before its term has expired.

How Does the Auto Sweep Facility Benefit You?

Whether you are a business owner using it through your current account or a salaried individual using it out of a savings account, there are benefits aplenty to enabling the auto sweep facility.

1. Higher FD rates

The main reason for opting for the sweep facility is to earn interest on money in your account. To get a better understanding of your expected earnings, you could even use an FD interest calculator.

2. Liquidity

The sweep facility enables you to have ample liquidity while ensuring a good return on your funds. Say you have an EMI pending or a cheque due and are running low on funds in your sweep current account. Your bank will automatically transfer the funds from the amount invested earlier to your account to ensure timely payment of the EMI or the cheque, saving you time and effort.

3. Flexibility

Banks generally let you choose the period of the deposit, the maturity, and the threshold amount. There may, however, be a minimum holding period for FDs, and premature withdrawal may lead to loss of interest.

4. Linking multiple deposits

You can link multiple deposits to the current account for sweep-in to ensure you never have a liquidity crunch. In such cases, banks usually apply the LIFO (Last in First Out) rule, which means that,  when a sweep-in is triggered,  funds will be transferred to your account from the latest deposit linked to the sweep-in facility.

5. Separate corpus

Apart from the higher interest rate, the sweep-in facility helps you create a corpus that you can access in an emergency, without having to liquidate any other asset.

[Read more: Differences Between a Current Account and a Savings Account]

Summing up

If you want to save money, maintain a robust balance in your current or savings account AND stay on top of your finances without having to tinker with your bank account every single day, then the auto sweep facility is the way to go.

Read more: AutoSweep facility

Enabled it on your account yet?

Frequently Asked Questions