What is the difference between normal FD and Auto- Sweep FD?

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You open a savings account online or offline to save for various goals, such as a down payment for a new car, a family vacation, or emergency funds. While saving is a great step toward financial security, keeping your money idle in a savings account could be limiting your returns. In today's economy, where interest rates are usually low, it is crucial to look for options to maximise your savings. A better alternative is a Fixed Deposit (FD) account. This simple yet highly effective financial tool allows you to earn higher interest rates on your savings.

But which fixed deposit to choose? An auto-sweep FD or a regular FD?

Understanding Normal or Regular Fixed Deposit

In a normal FD, once you invest your money, you will receive interest at a fixed rate until the end of the tenure. There are restrictions on premature withdrawal before maturity, and the interest rate remains the same throughout the FD duration.

Understanding Auto-Sweep Fixed Deposit

An auto-sweep FD is a deposit account that combines the features of a savings account and a fixed deposit. The excess funds in your savings account, over a certain threshold, are automatically transferred into the FD account.

For example, Kotak ActivMoney savings account provides an auto-sweep facility where the default threshold is Rs 25,000. If your savings account balance crosses this threshold, any funds that exceed it will be automatically transferred into a 180-day Fixed Deposit.

Differences Between Normal FD and Auto-sweep FD

Interest Earned

When you opt for a normal fixed deposit, you agree to deposit your savings for a predetermined tenure and earn interest at a fixed rate for that period.

An auto-sweep fixed deposit is linked to a savings account, and the funds exceeding the set threshold earn interest at the prevailing fixed deposit rate.

Premature Withdrawal

You can withdraw your money from normal fixed deposits before maturity, but you will be charged a penalty fee. It can be anywhere between 0.5% to 3% of the interest rate.

With an auto-sweep FD, there's no penalty fee for premature withdrawals. This feature helps you earn returns on your savings while also maintaining liquidity at all times without worrying about any penalties.

Interest Flexibility

With auto-sweep FD, even after a portion of swept-in funds is withdrawn, you still earn interest on the remaining balance. However, with regular fixed deposits, the moment a withdrawal is made, the account stops earning any further interest.

Reverse Sweep Feature

The transfer of funds in auto FD is done based on a specific threshold value. If the account balance falls below that set threshold, the deficit amount is automatically compensated from the linked FD. For instance, if the set threshold is Rs 25,000, and the account balance falls to Rs 20,000, the remaining Rs 5,000 will be taken from the linked FD to maintain the mandated balance. This feature is not available in regular fixed deposits.

To Wrap Up

Normal fixed deposits are ideal for individuals who have a lump sum amount to invest and are looking for a fixed return at a fixed tenure.

Auto-sweep FDs are better suited for individuals who maintain a high balance in their savings account and require flexibility in their investments. These FDs provide the added convenience of automatically transferring unused funds from a linked savings account, helping you earn additional interest on your 'surplus' money without having to lock them into a rigid investment plan. And who does not like to maximise the value of their savings and earn a little extra?

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Disclaimer: This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Tax laws are subject to amendment from time to time. The above information is for general understanding and reference. This is not legal advice or tax advice, and users are advised to consult their tax advisors before making any decision or taking any action.

What is the Difference Between Normal FD and Auto- Sweep FD?