Amid the coronavirus pandemic, bank customers have started saving more. For the fortnight dated 5 June, RBI data had shown that deposits rose by 11.3 percent while credit growth remained low at 6.2 percent in the same period. This has resulted in the banks cutting deposit rates to protect their margins. Further, RBI's reduction in its key rates has also caused banks to lower their lending rates as well as interest offered on deposits.
It is most likely that your bank has also reduced its interest rates on the savings bank account to its lowest in years. It is also highly possible that you prefer to keep your money in a bank account than risk it on market-related investments. Savings bank accounts are secure and provide liquidity to take care of emergency expenses.
The good news is that to make most of the facility, every Indian bank now provides 'Sweep-out' and 'Sweep-in' facilities to earn slightly more on your savings bank account.
What is the Sweep-out and Sweep-out facility in bank accounts?
These are special savings accounts with automatic "sweep-out" facility wherein the surplus funds are put in a fixed deposit and when you need the money or when your bank account starts running low on funds, the fixed deposit will be automatically dissolved and money will be moved to the savings account to meet the shortfall. This ensures that money in your bank account is not left idle and you receive better returns through higher interest when compared to a regular savings bank account.
The convenient part is that you do not need to track idle funds regularly and only need to give instructions to the bank to create term deposit out of your savings account. The process of transferring money into fixed deposit happens automatically after you have provided instructions to the bank to avail the facility.
In providing these instructions, you also have to decide on a threshold that will define what would be "surplus" to be moved into an FD. You can fix anywhere between Rs 10,000 to Rs 1 lakh as your threshold. Once the threshold is reached in your savings account, the bank will create FD for the surplus amount for a period between one to 5 years. When the FD matures, it will be auto-renewed by the bank.
For example, if you need Rs 20,000 to meet your monthly expenses, you can set the threshold at Rs 20,000 and the remaining amount in the bank account will be moved to an FD linked to this savings account.
Choosing the right savings account
These accounts are also known as Flexi-deposit accounts and various other names. Each bank calls this facility by a different name and features like tenure of the FD could also vary.
While the primary factor in choosing the savings account would be whether or not the bank provide such a flexi-deposit account facility, the interest rates are also very important as that will increase your earnings over a particular period.
Almost every commercial bank in the country provides the sweep-in-sweep-out account facility. Your choice will rest on the picking from banks with best interest rates on savings accounts and also on their FDs.
Note that interest earned on the FD is taxed like any bank FD, that is, based on your income tax slab.