Fixed deposit, savings account interest rate falling? Consider investing money in sweep-in-FD

State Bank of India or SBI slashed fixed deposit interest rate today. SBI had also cut interest rates on all its savings accounts to 2.75% in April. Private lender Kotak Mahindra Bank too reduced its savings account interest rate from 4.5 per cent to 4 per cent on 25th May 2020. Other banks have also been cutting rates rapidly over the past two months. So, amid reducing fixed deposit and savings account interest rates, one can think of putting money in the sweep-in-FD and get more money in return.

What is sweep-in-FD

A sweep-in-FD is linked to one's bank savings account and it fetches more returns than a normal savings account. In fact, one can get returns on one's savings account linked to sweep-in-FD in sync with the fixed deposit returns and at the same time, one can use one's money from the sweep-in-FD in the case of requirement of money.

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Suppose your savings account has a balance of Rs 10,000 and your sweep-in FD has a balance of Rs 1 lakh. Now, imagine that you need to spend Rs 30,000 to make purchase. You can go ahead and buy. The excess Rs 20,000 over and above your savings account balance of Rs 10,000 will flow into your savings account from the sweep-in FD. For such premature withdrawal, you will get the applicable interest rate depending on the amount and tenure (the number of days for which the FD was maintained).

How sweep-in-FD is better than traditional fixed deposit

In the case of premature withdrawal of money from one's fixed deposit, banks generally charge penalty which could be the FD interest rate minus 1 per cent. Apart from this, one needs to visit the bank for liquidating fixed deposit. So, you can't use your money in the fixed deposit right away as you can in the sweep-in-FD. Apart from this, there is no penalty on money withdrawal from the sweep-in-FD.