Letting huge sums lie in your savings (SB) account may not be the most efficient way to manage your money. Most banks offer only a 4% interest rate on the balance in SB accounts. Worse, banks such as SBI offer only 3.5% and following its recent decision to link SB interest with the RBI’s repo rate for balances above ₹1 lakh, it may go down even further, at times when there is a repo rate cut. While few banks such as Yes Bank and Kotak Bank offer 6% per cent interest on accounts with higher balances, at most times, even this could be lower than what fixed deposits can offer. Flexi deposits and sweep options provided by banks are two ways in which one can maximise the earnings on savings deposits.
Bang for the buck
Flexi deposits are those linked to your SB account. Whenever you feel there is too much lying in your SB account, you can create a linked fixed deposit for a specific tenure. This amount will earn as much interest as a normal FD of a similar tenure. The advantage is that, if your SB account falls short of money when you are executing a transaction, the sums in this deposit will be transferred back to the SB account. The only hitch here is that the creation of the deposit is not automatic. You must remember to create one manually every time you feel there is excess money lying in your SB account. The sweep option overcomes this problem. Under this, balances in SB account over and above a particular amount are automatically transferred (sweep) to a deposit. Like in linked FDs, they are then reversed to your SB account when it falls short.
But maximising interest is easier said than done. Banks have widely varying rules when it comes to flexi deposits and sweep accounts. While the sweep option appears more convenient, the fact is not all types of SB accounts provide automatic sweep and reverse sweep facility. Take ICICI Bank for instance. This facility is available only with its Gold Plus Optima Savings Account, which requires a higher average quarterly balance of ₹50,000 to be maintained.
Besides, while the sweep and flexi deposit options offer higher interest than SB accounts, optimising the interest is not easy. Banks define the sum you can transfer to a deposit, the time period you can hold it there and the interest rate you can earn. Trigger amounts for the sweep facility vary across banks. A lower trigger could help you maximise interest earnings.
For example, the trigger for sweep into an FD from HDFC Savings Max is ₹1 lakh and even then, the minimum amount that will be swept is ₹25,000, implying a trigger at ₹1.25 lakh.
That could mean that funds up to ₹1.25 lakh will stay idle in your SB account, which could have earned more interest had the trigger been lower. On the other hand, SBI’s Savings Plus account allows you to set the trigger yourself, beginning at as little as ₹5,000. The minimum deposit is ₹10,000. Coming to tenures, like Axis Bank’s offer of six months to five years tenure for its Encash 24 flexi-deposits, many banks allow you to choose the tenure of the deposit.
This flexibility is important, as you can choose the time bucket offering the maximum interest rate at the time of making the deposit. However, Bank of Baroda’s Super Savings Account, for instance, sweeps out excess funds only to a 181-day deposit, while HDFC Savings Max sweeps them strictly to a one- year and one-day deposit. Shorter tenures also bring with them the hassle of constantly renewing deposits or finding new avenues to invest the proceeds.
There are also other factors to be checked, such as whether the deposit will be auto renewed for the same tenure and whether interest will be compounded or paid out. City Union Bank’s Flexi Fix FD, for example, does not compounded the interest and only a simple interest is paid out.
Auto renewal may imply one job less for you, but it deprives you of the benefit of choosing the tenure that offers the maximum interest rate. Banks may charge a penalty on premature closure of flexi deposits.
Then, there are things associated with the reverse sweep that you must be aware of. Banks usually reverse sweep only in multiples of ₹1000, ₹5000, etc. The lower the trigger for reversal, the better it is for your interest earnings. Secondly, a ‘Last In First Out’ (LIFO) method of reversing the funds is ideal, since it hurts less. However, not all banks follow this rule outright. SBI, for instance, has a default LIFO option but at the same time requires the customer to specify whether the LIFO or the ‘First in First Out’ (FIFO) principle should be applied while breaking the deposit.
Also, you need to check if funds will be reverse swept only to enable a transaction go through or a cheque to be passed or if it will be reversed even when your account balance falls below the minimum balance. If it is not applicable on the latter, you may end up being charged for non-maintenance of minimum balance.
Thus, even as you strive to be more nimble on your feet with your earnings, you must look before you leap.