written by | October 20, 2022

Know What is a Sweep Account - Features & Eligibility

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Table of Content


A sweep account is a type of brokerage or bank account. If a customer's account balance exceeds the average limit determined by the customer, the excess amount is transferred to a high-yielding money market account.

A sweep account connects two or more financial institutions or banks and transfers funds between them in a predetermined manner. Sweep accounts help to manage a consistent cash flow between a cash account used for scheduled payments and an investment account where funds can earn a higher return. Many banks and financial institutions offer sweep account services to individuals and small business owners. It has also become a part of the services offered by credit card companies.

Banks provide this service to customers by maintaining their accounts and carrying out their statements. They invest the excess funds in the market by transferring them to a money market account. The surplus transferred to the sweep account can be easily liquidated. Customers can make money on their investments. The bank also gives the option of receiving financial advice or making their own investment decisions. Customers typically try to invest in the money market because the rate of return is higher. However, there are risks associated with the returns.

Customers, on the other hand, can wisely invest the excess money in their regular accounts that they are trying to invest in the money market if they seek good financial advice.

Did you know? A sweep account can offer a yield ranging between 0.6% to 2.6 %. 

Features of Sweep Deposit Account

  • These accounts automatically transfer excess funds to the money market account to prepare them for money market investing.
  • The amount of money moved is specified by financial advisors and bank customers.
  • This account allows the consumer to earn a larger return on investment than the standard FD interest rate.
  • It is often referred to as the auto sweep account.
  • It's a clever approach to keep business people's daily cash flow balances consistent.

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The Policy Followed by Companies

Some businesses choose to have all of their funds swept into a sweep account. This is when they believe that the additional income will balance the returns they would have received if the cash had remained in the account. Other companies estimate the amount required to reimburse the returns and only sweep funds in excess of that amount. Companies pay a premium for more complex investment plans and thorough information from their bank. For example, knowing when the cheques they issue are likely to clear allows them to more precisely calculate how and how long to invest. This is referred to as regulated dispersal.

Personal vs. Commercial Sweeps

Sweep accounts for individual investors are often used by brokerages to hold money that is waiting to be reinvested, such as dividends, incoming cash deposits, and money from sell orders. This money is often swept into high-interest holding accounts or money market funds until an investor decides on future investments or the broker can execute existing standing orders within the portfolio.

Sweep accounts are a common business tool, particularly for small enterprises that rely on daily cash flow yet wish to maximise earning potential on idle cash reserves. A company establishes a minimum level for its primary checking account, below which any funds are swept into a higher-interest investment product. If the amount falls below the threshold, the funds are transferred from the investment account to the checking account.

The sweeping process is normally set daily from the checking account, depending on the institution, while the return of funds may face delays. With the changes in the checking account regulations, some banks are now offering high-interest rates on balances above a specific threshold. If the amount falls below the threshold, the funds are transferred from the investment account to the checking account.

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How Does a Bank Sweep Account Work?

  • In a banking sweep account, first, a cash account is established, and a lump sum of money is deposited into it
  • The customer will agree with the financial advisor on the average balance for the account. This amount can be decided in advance depending on the service of the institution
  • The extra cash which is deposited more than the average level is invested in CD (Certificate of Deposit), or any liquid instrument or money market
  • When the cash account balance falls below a predetermined average balance, some of the investment is liquidated and the proceeds are placed into the cash account, to maintain the average balance
  • If the initial estimates are correct, the interest on cash and investment returns should produce a significant return to raise the overall value of the sweep banking account
  • During a negative economic cycle, the funds in the investment accounts may fall so low that significant gains are not achievable to maintain the average level in the cash account. In these circumstances, financial institutions would either request additional funds for the investment account or offer alternatives for investment and liquidation
  • Sweep accounts are important and considered as a financial innovation.The tenure of the sweep-in deposit can range from one to five years.

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Who is Eligible to Open a Sweep Account?

The sweep bank account service is not available to all bank customers. The requirements may differ from one bank to the other. To be eligible for it, you must generally open a fixed deposit of at least 25,000 with your bank. Alternatively, you could open a premium account with a monthly or quarterly minimum balance in the range of 25,000 to 1 lakh.

Is a Sweep Account Beneficial?

  • Aside from a higher interest rate, another benefit of the sweep bank account is that it creates a separate corpus from which you can draw during emergencies without affecting your normal investments or having to dispose of fixed deposits
  • It also has no withdrawal fees or penalties. Even if you withdraw funds from the deposit, the remaining balance will continue to earn interest at the same rate
  • Sweep accounts assist you in compounding your money. Excess funds in your checking account can be moved to an interest-bearing account.
  • They can also be used to consolidate debt. Instead of directing the excess funds to an interest-earning account, a sweep account would direct the excess funds toward loan payments. The procedure is made more efficient, convenient, and cost-effective.
  • It offers the convenience of simple money administration. Sweep money funds help to ensure that you earn an interest. Such accounts are also typically very liquid, which means your money is always available. A sweep account is a simple method to make your money available for you without adding another task to your to-do list.

Conclusion:

While the sweep-in feature can help you make more money from surplus funds, there are a few things you should think about before using it. The default period of the sweep-in deposit into which your surplus cash is deposited, and the interest rate, will vary depending on what your bank offers. In other circumstances, the sweep-in feature may only provide marginally higher interest rates than your savings account.

The banking sweep account works well for individuals who have a large idle sum in their savings accounts. However, consider whether you would be better off investing the surplus in other products that perform better for your overall financial goals.

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FAQs

Q: Which banks offer sweep facility in India?

Ans:

Top Indian banks like Kotak Mahindra bank, HDFC bank, SBI bank offer the Sweep-in fixed deposit facility.

Q: What are the eligibility requirements to open a sweep account?

Ans:

You must either register a premium account with a minimum average monthly or quarterly balance of 25,000 to 1 lakh or take out an FD (Fixed Deposit) of at least 25,000.

Q: What exactly is a 100% cash sweep?

Ans:

During a cash sweep, all available cash flow for debt payment is utilised to repay principal and interest.

Q: What is the rate of interest on a sweep account?

Ans:

 The rate of interest on a sweep account is currently around 6.75 %.

Q: How can I set up a sweep account?

Ans:

An account holder must apply for or send a request to the bank. Customers can open a savings account and link it to a fixed deposit, or they can open a fixed deposit and link it to a savings account.

Q: Is a sweep account beneficial?

Ans:

A sweep account might help you get the most out of your money if you run a business with a big deposit level. It can help you earn more interest on your money and pay off your debts faster. Make sure that you have calculated your company loan payments and are aware of any dangers or expenses.

Q: Are sweep accounts subject to taxation?

Ans:

Sweep funds provide taxable or tax-free income. Investment income from some tax-free money market funds may be liable to state and local taxes, and the central alternative minimum tax, depending on your tax situation.

Q: Can I withdraw money from my sweep account?

Ans:

Yes, you can withdraw funds from your sweep account just like from a checking or savings account.

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The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.
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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.