Have it all with flexi deposits

Do you fret over the fact that your money lies idle in a savings bank account? While you don’t want to lock it into some long-term investment, you would like a better return than the meagre amount your savings account fetches.

You have two options here. One, linking your savings account with your fixed deposit account, known as a sweep facility. Two, opening a flexible fixed deposit. Both routes give you better returns, along with flexibility.

Under one option, for instance SBI’s Savings Plus Account, your balance beyond a certain limit in the savings account gets swept into a fixed deposit, thereby earning you a higher return.

In the second, for instance, HDFC Bank’s flexible bank deposit, the money is lodged in your fixed deposit, earning a higher rate of interest until you opt to move it into the savings account to meet a shortfall.

In the sweep system, even as the money parked in the FD earns higher interest, you can access it at any time by issuing cheques or withdrawing from the ATM. If your withdrawal exceeds the amount in your savings account, an amount equivalent to the shortfall will be broken off from the FD and put into your account.

Banks differ on the limits beyond which money moves into an FD and multiples in which FDs are created or broken. For example, under SBI's Savings Plus Account, you can decide your own threshold amount, as long as it is ₹5,000 or more. Once this is done, every time you amass a minimum of ₹10,000 (and beyond that in multiples of ₹1,000) over the threshold, it gets transferred to the FD account.

But in Axis Bank’s Encash 24 flexi deposit, any extra money over ₹25,000 (the limit set by the bank) in multiples of ₹5,000 is sent off to the FD account.

Bank of India breaks an FD in blocks of ₹1,000 while Axis Bank sets the multiple at ₹5,000.

Note that if you fail to maintain the minimum account balance prescribed by your bank, you will have to pay a penalty.

The amount broken from your FD will earn the interest rate applicable for the period for which it was held. The remaining amount that sits in the FD will continue to earn the higher rate.

Let’s say your savings account balance is ₹20,000 and the amount in your fixed deposit is ₹10,000, which you completely withdrew after holding it for one year. After one year, the ₹20,000 would have earned interest at the savings bank rate, which is 4 per cent for most banks.

The ₹10,000 would have earned interest at the rate the bank offers on one-year fixed deposits, currently around 8.5 to 9.5 per cent. But say you withdrew only ₹6,000 instead. Then this would have earned the one-year deposit rate of interest. The balance ₹4,000 that remains in the FD will earn the interest applicable on a fixed deposit of longer tenure – that is, the period till you break it.

Banks follow the system of ‘last in first out’, where the amount swept into the FD last is taken out first. This way, your interest loss is minimised. Besides the facility explained above, you can also open a flexi-deposit. Here, you open a fixed deposit first. Then, if you are ever in need of cash, you can simply withdraw from this deposit, without suffering any penalty.

But you cannot add money into this FD as and when you wish. It is the flexibility of breaking in parts that sets this FD apart from a usual FD. This product is, however, not offered by many banks.

Among the few that do, State Bank of India allows withdrawals from the FD in blocks of ₹1,000. Kotak Mahindra Bank allows it in units of ₹1 matching exactly the shortfall.

Flexible schemes such as the sweep facility cannot substitute long-term investing. They only serve to give slightly higher returns than a savings account. So, use it for funds you may want at any time, but which you don’t require immediately.

Liquid or ultra short-term funds also allow flexibility with better returns than a savings account. On an average, these funds have returned 9 per cent in the past year.

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