Sweep-In FD: A Good Place To Build An Emergency Fund, But Conditions Apply

The idle money sitting in your savings or checking account could earn you interest. In a sweep-in account, one can tap into this advantage without losing the liquidity of the fund.

A sweep-in account is a type of bank account where funds above a set threshold automatically get moved to a fixed deposit. This can help earn a better interest compared to the savings account.

An added benefit is that money can also be transferred from the FD back to one's main account, if the need arises. This system can help avoid cheque bouncing and overdrafts.

Emergencies call for large amounts of money to be made available within a very short time.

In case of a financial emergency, a sweep-in account allows the account holder to use funds from the FD account without losing out on the interest completely. If partial withdrawal from the FD is done, then the remaining amount will continue to earn interest. One can also choose a lock-in period for the FD.

"It works well for an emergency fund as it fetches you something from money simply parked in a fixed deposit," said Mohit Gang, co-founder of MoneyFront.

Advantages such as interest earned and ease of management make this a favourable option.

"The interest will be earned when money is moved to the other account. It's a good cushion for individuals. This auto facility gives a quick check in advantage as well," said Gang. If one has idle money or business working capital for a while, this interest can bolster the overall earnings.

"Getting higher interest is the biggest advantage, but one needs to be mindful of the usage," said Amol Joshi, founder of PlanRupee Investment Services.

It would be advisable to exercise caution while tapping into the advantages of this account. Here are a few things to keep in mind:

Be mindful of payments debited from the sweep-in. Also, make sure the conditions imposed by banks on the lock-in period are clearly understood. If the account holder is not careful, big non-emergency amounts will also get debited from the FD account.

"In this case, expenses like society bills, fees or EMI payments get debited from the FD. The whole sweep-in amount or part of it is not able to complete 15 days into the product. Here, one does not save, but earns no interest either, which is counter productive," said Joshi.

This is not the only disadvantage to the account, however. The interest earned from the fixed deposit is taxable. Interest rates of sweep-in accounts will always be lower than other fixed deposit interest rates, according to Gang.

There may be terms, conditions and tenures of lock-in periods that may be different in various bank systems.

Though this may be a good place to build an emergency fund, it might not be beneficial if not handled with care.

"If one can make an effort, an overnight mutual fund is better. If one has a larger horizon like a few months, then arbitrage funds could also get better taxation benefits and yield," said Joshi.