India’s annual inflation climbed to 6.4 per cent in February this year, much higher than the Reserve Bank of India’s (RBI) price comfort levels. Yet, limited income and fewer earning avenues for most Indian households make it all the more difficult. Therefore, returns from your saving bank accounts do matter, although they may not help you beat the biting inflation comprehensibly.
However, you cannot underestimate the importance of a savings bank account just because of its relatively low-interest rates. A savings account provides safety to your money and is available offline and online at your command. Moreover, in a rising interest rate scenario, depositors can earn more on their savings by using facilities like the ‘automatic fixed deposit’ offered by many banks—a simple and useful option for better value for your unused money, compared to complex investment options like stocks, property, etc.
Depending on the banks, this facility comes with different names. For instance, the State Bank of India (SBI) calls it SBI Multi Option Deposit Scheme (MODS), Axis Bank calls it Auto Fixed Deposit, and Kotak Bank names it Sweep In facility.
The auto sweep facility offers interest rates on par with fixed deposit rates without blocking the funds. The minimum limit of an auto sweep facility varies from bank to bank. Under this scheme, the amount is automatically transferred to a fixed deposit account in multiples of Rs 1000 or Rs 5000.
For example, if your bank offers 3 per cent interest annually on your savings account on a monthly average balance, say, Rs 50,000, you would earn around Rs 123 per month (50,000* 3/100 *30/365). At the same time, with an auto-sweep fixed deposit (FD) facility, you can earn higher interest on the same amount. Assuming that the annual interest rate is 6.8 per cent, the monthly returns would be around Rs 140 on an auto FD plan of Rs 25,000, compared to Rs 62 on Rs 25,000 in your savings account, given that it is the threshold limit.
So you gain more monthly interest if you take the auto sweep facility. This could be useful to those who have excess funds in their accounts. They can earn more from their savings account using this option, which offers the dual benefit of a saving and fixed-deposit account, with full access to liquidity.
On the other hand, a fixed deposit account locks in the money. Besides, a fixed deposit for less than seven days generates no interest. Hence, this facility may only be helpful for those who withdraw money occasionally from their account. However, it may work better if you have surplus funds in the account—an ideal option to park your emergency funds.