As a business wealth management company, when we connect with new prospects and clients to understand how they manage their business’s idle cash, we often get “Auto Sweep” as an answer. Are you also utilizing the auto sweep option or planning to use this service? If yes, then you are definitely losing a lot of potential profits. Here’s how:
On the convenience front, the auto sweep feature is excellent as excess cash from your accounts gets shifted to Fixed Deposit automatically. But is this an ideal investment option for you as a corporate investor? Let’s explore –
So, what is the auto sweep facility?
Auto sweep links your current account to a fixed deposit, and when your account crosses a predetermined threshold limit, the surplus cash is put into an FD. Let’s try to understand this with an example – for an instance, you have Rs. 50 lakh in your current account and your threshold limit is Rs 1,00,000. With the auto sweep, any amount above Rs 1,00,000 i.e. Rs 49,00,000, in this case, will be transferred to FD.
This also works in reverse. Hence, if you wish to withdraw more than your defined threshold limit, then the balance will be taken from your FD automatically.
The feature that lures people to choose auto sweep service is the fact that the idle cash in their current account (generating zero returns) can be smoothly transferred to FD to earn a little extra.
But, did you know?
- The minimum maturity period of FD is 7 days. This means that if you withdraw your money before 7 days due to some unanticipated expense, you will not get any returns.
- Banks mostly offer a minimum return on an auto sweep. This implies that you get the same interest rate if you keep your money in an auto sweep for 7 days or 1 year.
- In addition, not all banks allow you to sweep into FD whenever you have idle-sitting cash. Most of the banks have a specified day, for instance, Monday, when they sweep money to FD. That being the case, if you have idle cash in your account on days other than Monday, then your money will not be swept into FD and you will lose out on returns.
What are the better alternatives?
Instead of choosing an auto sweep facility and losing out on interest, you can invest your idle cash in more profitable and flexible investment instruments such as overnight mutual funds, and liquid mutual funds.
Now you must be thinking why mutual funds over auto sweep, then here is your answer –
- Mutual fund schemes like overnight funds have a maturity of one day, which means if you have idle-sitting cash for weekends and holidays, you can invest in to make more profit. However, the same doesn’t apply to auto sweeps – you can’t earn interest from an auto sweep account by parking your cash just for weekends and holidays.
- Liquid funds generate moderate returns (historically more than fixed deposits).
- You can withdraw your money in just 24 hours with liquid funds, without paying any exit load.
All in all, if you are simply relying on the bank’s auto sweep, then you are not making the most out of your idle business cash. Make the optimum use of your excess cash by investing in mutual funds. Mutual funds generate better returns, offer high liquidity and come with the flexibility to park your idle cash even for shorter durations like weekends and holidays.
Want to learn more about how these schemes tend to give similar returns or slightly better returns than an auto sweep of equal or comparable investment tenor? Get in touch with experts at Shootih.