Swipe in FD vs Savings Accounts: Which is Better?

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Innovative products sell the most and the best essentially because they provide better value for money. The same applies to financial instruments as well. Financial instruments are expected to multiply the money better and thus must be innovative.

Image Source – Investments

With the declining interest rates on savings account deposits, banks came up with a more productive and flexible product known as the money multiplier or the sweep-in fixed deposit. It combines the features of a Fixed Deposit [FD] and Bank Account.

Profitability in flexibility

With a sweep-in FD account, you do not have to worry about maintaining the minimum balance in your account and at the same time, you do not have to be concerned that your funds are not earning enough.

Although the functioning of this money multiplier account varies from one bank to another, the underlying principle is the same. The minimum balance amount is retained in your account and the surplus is converted to an FD.

As and when required, the FD automatically is discontinued and transferred to the regular account to maintain the stipulated balance and meet the debited amount on the account.

This allows you to earn higher interest on the surplus amount in your bank account, through the flexible FD without having to spend time on making and breaking the FD.

Here are five things to pay attention to while selecting this facility.

  1. Tenure of the FD

Different banks have different tenure options available for the auto swipe-in facility and they could charge premature withdrawal penalty. Ideally, the tenure is a year and not all banks charge the premature withdrawal penalty. Different banks have different tenures so do check the same before opening the account.

  1. Threshold limit

Some institutions may levy certain threshold limit while others may allow you to choose the same. A lower limit is beneficial as it enables you to earn higher returns on your savings.

  1. Interest rates

Most banks offer the same interest rate on such facilities as available on regular deposits. However, regular FDs offer marginally higher interest rates to senior citizens but the swipe in FDs may not provide this benefit. Thus, keep this in mind, when opening such an account for your senior citizen parents/relatives or in case if you are one.

  1. FD size

Generally, the surplus amount is divided into smaller ticket sizes and then converted into FDs so that you do no lose in case of premature withdrawal. The lower the multiple the higher are your earnings.

  1. Withdrawals mechanism

Evidently, the interest earned by the FD is going to be proportionate to the tenure it was with the bank and thus, you must opt for Last in First out (LIFO) method of withdrawal. This will allow you to earn better returns. However, if you make frequent withdrawals choosing the First in First Out [FIFO] mechanism is advisable.

The interest earned on the sweep-in FD is taxable as per your tax slab. This facility is beneficial to earn slightly better returns than a regular saving account. However, to meet long-term goals, it is advisable to choose other investment options that provide inflation-beating returns.