Auto Sweep Fd Vs Regular Fd Know The Key Differences

Individuals maintain bank accounts to keep their money safely so that they can use it in times of contingency. Investing the money in a fixed deposit is a smarter way of making the money work for you. This way, you can earn interest on it. Fixed Deposits are further divided into Normal FDs and Auto-Sweep FDs. In this article, we will explain the significance and the difference between Normal FD and Auto-Sweep FDs. 

What is a Normal Fixed Deposit? 

A Normal Fixed Deposit is a straightforward investment made where a lump sum of money is locked in for a fixed term. A Normal Fixed Deposit provides individuals with a predictable set of amounts at a fixed interest rate after a specified term. The rate of interest that is provided by an FD is higher than that of a regular savings account. The amount invested in a Normal Fixed Deposit is locked in for the specified fixed term.  They have the choice to renew their fixed deposit for another term. Pre-withdrawal of FDs might attract penalties.   

The following table clearly depicts a small overview of the fixed deposit. 

 Features of a Normal Fixed Deposit  

• Higher Interest Rate: Fixed Deposits offer a higher interest rate than savings accounts. Senior citizens attract a higher ROI when compared to others.   
• Flexibility: On maturity, you can either withdraw the said amount or renew it for another term. The ROI is compounded monthly, quarterly, half-yearly, and annually.  
• Investment Tenure: The average investment tenure for an FD ranges from 10 days to 10 Years. This will vary depending on the banks and financial institutions.  
• Withdrawal Options: Partial or full withdrawal of the fixed deposit is allowed. But the banks or financial institutions might charge you some penalties.  
• Tax Deductions: Taxpayers can invest in tax-saving FDs to save taxes under Section 80C.  

What is an Auto-Sweep FD?  

One of the most intelligent banking features available with modern banking is the auto-sweep facility. It provides you with the flexibility to utilize surplus funds to earn a higher rate of interest while maintaining liquidity. When your savings account balance reaches a certain limit, banks automatically convert the excess amount to an FD. The amount is returned when needed, providing you with the flexibility of liquidity when required.  

Features of an Auto-Sweep FD  

The following are some of the notable features of an Auto-Sweep FD.  

• Better Return on Deposits: Apart from the savings account interest, you have the flexibility to earn a higher rate of interest with an Auto-Sweep FD.  
• Seamless Account Integration: You have the flexibility to link multiple fixed deposits to your savings account, providing a seamless experience. 
• Easy Access to Funds: You can easily access funds for various needs, such as EMI payments and cheque disbursements. An auto-sweep FD gives you the flexibility to access urgent financial needs without any resultant non-payment or a poor credit score.  
• Flexible Withdrawal Options: You have the flexibility to reverse the amount required to meet your needs, rather than breaking the entire FD. Only the deficit amount to meet your financial contingency is returned to your account rather than the entire FD amount.  
• Automated Fund Transfers: Banks do not require any additional instructions. Once the facility is set up, it operates independently without any further intervention.  
• No Hidden Charges: There are no additional hidden charges, such as overdraft fees, if you do not have sufficient funds in your savings account. 

Read Also: SBI Auto Sweep Facility: Complete Guide

Normal FD vs Auto-Sweep FD: Key Differences 

The following table clearly enlists the differences between a Normal FD and an Auto-Sweep FD along with the basis of differences. They are: 

Benefits and Limitations of Normal FDs  

Fixed Deposits have been known as the primary source of investments. It allows individuals to deposit a lump sum amount for a fixed interest rate. This ensures steady and risk-free returns. FDs are known for their safety and reliability, and also come with certain benefits and limitations. One needs to have a proper understanding of these merits and demerits before making an investment.  

Benefits  

• Regular Returns: Offers you an assured and stable return unaffected by market fluctuations.   
• Safe Capital: One of the safest investment options when you maintain it with reputed banks and financial institutions.  
• Flexible Tenure: Normal FDs offer flexible tenure ranging from 10 days to 10 years.  
• Regular Payment of Interest: Interest is given at the end of the tenure or credited to your savings account monthly, quarterly, half-yearly, and annually.  
• Loan Facility: A Loan can be taken by pledging FDs as collateral.    
• Tax-Savings Option: There are tax-savings FDs that give you the flexibility of tax deduction under Section 80C.   

Limitations  

• Manual Intervention: You need manual intervention for an FD. You need to release the cheque from your bank account, complete the requisite forms, and obtain the fixed deposit on hand.  
• Locked Funds: The funds get locked for a predetermined time period. You will not have the flexibility to use funds as needed.  
• Inflation Impact: The returns accrued from the FD will not keep pace with inflation. The value of the interest received on the interest will decrease over time.  
• Penalties on Early Withdrawal: If you want to withdraw from the FD before the maturity date, you might need to bear penalties on early withdrawals.  

Benefits and Limitations of Auto-Sweep FD  

Auto-Sweep FDs give you greater flexibility to earn a higher rate of interest on the excess amount lying in your savings account. This FD also gives you the benefit of liquidity whenever you are short of funds. But like any other financial instrument, the Auto-Sweep FD has its own set of merits and demerits.   

Benefits:  

• Higher ROI: In addition to your savings account interest, surplus funds earn a higher rate through the auto-sweep FD.  
• Auto Conversion: Auto-sweep FD helps automatically convert any excess amount that is lying in your savings bank account.  
• A partial withdrawal of the FD amount is possible, allowing you to break only the required amount.  

Limitations:  

• Variable Returns: The Auto-sweep FDs might not give you the required returns, making the returns less predictable than a regular FD.  
• Complex Interest Calculations: As the amount lying in the savings account earns both the savings account interest and auto-sweep FD interest. It is difficult to calculate the total interest earned on the same.  
• Minimum Balance Requirement: Your savings account might require you to maintain a minimum balance. Therefore, there is a possibility that you may need to liquidate your FDs if there is a deficit of funds in the account.   

Which is Better: Normal FD or Auto-Sweep FD?  

Whether choosing a normal FD or an Auto Sweep FD is a matter of your own convenience. Both forms of FDs come with their own sets of merits and demerits.   

You can choose a normal FD if  

• You have a lump-sum amount of money that you will not need for a long period of time.  
• You have the priority of a fixed and assured return on your entire investment.  
• You have long-term goals when it comes to investing.  
• You prefer planning and discipline. Once you invest the amount, you can leave it till maturity.  

You can choose an Auto Sweep FD if  

• If you are a salaried individual or a businessman who has a flexible cash flow in your account and has surplus funds at the end of the month.  
• You want the idle money in your account to earn a passive income in the form of interest without needing to transfer it.  
• You want access to the funds without being penalized for breaking FDs.  

Conclusion  

Digital banking has experienced significant growth, and an increasing number of people are demanding flexibility in their money management. Whether to invest in a normal fixed deposit or auto-sweep FDs depends on the individual. Both forms of FD investments have their own set of merits and demerits.   

You can choose between Auto-sweep and normal FD, depending on your long-term financial goals. If you are a person who wants the idle funds lying in your bank account to earn interest for you, then you can go for an Auto-Sweep FD. However, if you are an individual who wants to adopt a disciplined approach towards achieving assured returns and long-term savings, then you can opt for the normal FDs. Determine your long-term financial goals and create an investment plan to achieve a bright financial future. 

Disclaimer: This page includes information that has been compiled from many sources and is only offered for informational purposes. Given that this type of data may change over time, we cannot guarantee the accuracy of the information supplied or included within it. It is anticipated that the user will confirm with the relevant source before making any choices or taking any actions.