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What is a sweep account?

In this article, we’re going to learn about a special kind of bank account – called a sweep account – that automatically transfers excess funds from your checking account to a high-yield savings account so that you can extract more returns from your cash while keeping it liquid.

Understanding the mechanics of a sweep account

A sweep account is a convenient and automated way to maximise the returns on your idle cash. These accounts are offered by many commercial banks and brokerage firms and generally any person eligible for a regular savings account is also eligible for a sweep account.

Here are some accounts to get you started:

  • HDFC Bank Sweep Account
  • ICICI Bank iExpress Savings Account
  • SBI Simple Savings Account: SBI offers a sweep-in-sweep-out facility linked to SBI Liquid Fund.

The sweep setup comprises two separate accounts – a primary cash account, which can also be a checking account, and a secondary investment account, which is also sometimes known as a money market fund.

The magic with this setup lies with one number – the threshold you set for yourself.

How sweep accounts work

Here’s a brief explanation:

  • Linked accounts: A sweep account links your checking account with a money market fund or another interest-earning investment account.
  • Threshold setting: You set a minimum balance you want to maintain in your checking account for regular transactions.
  • Automatic sweeps: Any amount exceeding this threshold in your checking account is automatically “swept” into the linked investment account at the end of each business day (or based on a predetermined schedule).
  • Maintaining liquidity: Some sweep accounts offer a two-way sweep feature also. If your checking account balance falls below the minimum threshold, for instance, funds can be automatically transferred back from the investment account to cover upcoming debits.

Understanding with an example

Assume that from your salary, you need roughly ₹25,000 every month to cover basic living expenses. So, you maintain that balance in your account every month no matter what.

However, if there’s extra cash on top of the ₹25,000 that you’re not using, you’re earning no return on it. This is because checking accounts don’t pay an interest. The solution is to leave the ₹25,000 be and invest the rest in a liquid fund for a short amount of time. This way, you still have the cash in case you need it (because the fund is highly liquid), but you’re also extracting an interest that’s higher than zero.

Enter sweep accounts – a system that sweeps the extra cash from your checking into a money market fund that offers, say 5%, per annum; no keeping track, no reminders, no manual transfers. Everything gets done automatically without you having to keep track.

In most sweep accounts with major banks, you can specify a specific threshold for a minimum balance, the frequency with which the account is swept (every business day, every week, every month, etc.), and whether money from your investments can be swept back to your checking to cover any excess debits.

Considerations associated with a sweep account

Since you’re getting a return from an investment, there is obviously some risk attached to the whole process too. Here’s a breakdown of that:

  • Investment risk: Even though sweep accounts are traditionally linked with money market accounts that are highly liquid, invest in risk-free assets, and are generally considered safe, the NAV of the fund can fluctuate from time to time. This means that you could risk losing a small part of your principal.
  • Exit fees: Money market funds have to be managed, which means that some of them might have exit loads or fees associated with them for withdrawing before a certain amount of time. Read account documents carefully to be aware of such nuances.
  • Taxes: Interest earned on the money market fund component of a sweep account is taxable as per your income tax slab, so be sure to count that in when you’re filing your Income Tax Return.

Frequently Asked Questions

Can I use a sweep account to manage emergency funds?

Not ideal. If you want to keep a significant amount of cash handy for emergencies, money market funds are not the place. Consider getting a high-yield savings account with more flexibility instead.

How do sweep accounts impact my ability to earn rewards on my checking account?

Depends on your checking account. Some banks might have minimum balance requirements for earning rewards on checking accounts linked to sweep accounts. If the sweep feature automatically dips your balance below the threshold, you might miss out on rewards. 

Can I link my existing savings account to a sweep account, or do I need to open a new one?

Many banks allow linking existing savings accounts to their sweep account programs. However, some might require opening a new account specifically designed for sweep functionality. Depends on the bank you have an account with.

Can I invest a lump sum into the linked money market fund through a sweep account, or is it strictly for automatic transfers?

The sweep functionality itself will likely remain operational even with a lump sum amount. You’ll just need to choose a new investment account to link with your sweep account.

Are there any penalties for exceeding the sweep-in threshold in my checking account?

No, exceeding the sweep-in threshold (the minimum balance you want to maintain) typically doesn’t incur penalties. The sweep account simply won’t transfer any additional funds to the investment account. 

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