Rahul is a freelance writer. In his line of business, income tends to be highly unstable. As a result, he sometimes has a healthy bank balance but there are also times when, due to the unpredictable nature of his clients’ payments, his account is almost empty and he struggles to pay his monthly bills on time and manage his savings. During these times, managing expenses and savings simultaneously becomes a balancing act for him.
Rahul is looking for a banking solution that gives him the flexibility of not only managing his savings, but one that will also compensate for his deficits during a financial crunch. At the same time, he also expects his bank account to offer him a good rate of interest on his savings.
He has considered options like investing in Fixed Deposits and Mutual Funds, but he also needs to have a contingency plan. What can Rahul do to manage his savings and handle his monthly payments at the same time?
Well, he can either opt for a sweep-in facility or a flexi deposit option on his Fixed Deposit account in the bank. If you’re wondering what these terms mean, read on to find out.
What’s a Fixed Deposit Sweep-in facility?
A sweep-in facility is an option offered by banks to their Savings Account holders. If you opt for this facility, you need to either open a Savings Account which is then linked to your existing Fixed Deposit account, or if you have an existing Fixed Deposit account, you gain access to a Savings or Current Account.
You need to specify the minimum amount that you would like to maintain in your Savings Account, and the excess amount is then automatically transferred to your Fixed Deposit.
In Rahul’s case, if he receives an amount of Rs. 50,000 from his clients, and the threshold limit on his Savings Account is Rs.10,000 then the excess amount of Rs. 40,000 will automatically get transferred to his Fixed Deposit.
Also, in case of a deficit in his Savings Account, his EMIs will automatically be deducted from his Fixed Deposit.
Key points about sweep-in facility
- You need a Savings Account with the bank to opt for the Fixed Deposit sweep-in facility.
- Fixed Deposits are created automatically in case of a surplus amount of cash in your savings account.
- You may end up having multiple Fixed Deposit accounts linked to one sweep-in account.
- In case of a deficit in the Savings Account, the Fixed Deposit that had been created last will be auto-debited to make the payment.
- You continue to earn interest on the other Fixed Deposits which were created in the past.
Understanding what a Flexi Deposit is
A flexi deposit is one in which you have an inter-linked Savings and Fixed Deposit account. In this case also, during times of deficit in your Savings Account, the money is automatically transferred from your Fixed Deposit account.
However, unlike in a sweep-in facility, the excess money in your Savings Account does not automatically get transferred to your Fixed Deposit account even if there’s a deficit. You have to manually deposit money in your Fixed Deposit account to fill the shortage of funds.
If you opt for a flexi deposit, you run the risk of earning lower interest rates on your Fixed Deposit account when there are shortage of funds. Also, the rate of interest is slightly lower when compared to a Fixed Deposit with sweep-in facility.
Key points about flexi deposit
- You need an existing Savings Account with the bank
- You need to connect your Savings Account with the Fixed Deposit account
- When there is surplus amount in your Savings Account, you need to personally visit the bank and open new Fixed Deposits with the excess amount.
- The Fixed Deposits will not be created automatically even if there’s surplus cash in your Savings Account.
- In case you liquidate your flexi deposit before maturity, some banks may charge a penalty of 1%.
What works for Rahul?
Considering Rahul’s scenario, opting for a Fixed Deposit with sweep-in facility will be ideal for him as it will help him save some money. He will also earn better interest rates and be able to manage his monthly expenses as well.
The major difference between flexi deposit and sweep-in facility for Fixed Deposits, is the auto creation of Fixed Deposits in the latter.
Perhaps, like Rahul, you could benefit from opening either a sweep-in or flexi deposit account. If, on the other hand, you’d like to open just a Fixed Deposit account, BankBazaar is just a click away.