What is a Flexi Deposit?
A flexi deposit is nothing but a bank deposit that offers you both higher rates of interest as well as total flexibility to break the deposit. The intention behind using this facility is to not compromise on your money's liquidity and at the same time benefit from higher returns.
For example, IDBI bank offers a facility wherein you can set an exact amount to be taken from your savings account on a monthly basis eg. Rs. 2,500 per month. This is to be locked into a flexi deposit for a certain tenure, which also is decided by you.
So for example, say you started in January 2012 and stipulated that Rs. 2,500 should be deposited from your savings account into a flexi deposit every month, for 12 months. So every month from January to December 2012, Rs. 2,500 will be deducted from your savings account, and deposited into your flexi deposit account as individual flexi deposits.
These deposits will earn whatever the banks rate of interest is on a one year deposit, if the tenure you have specified for each deposit is 1 year. Please remember that interest is taxable.
What is the key benefit of a flexi deposit?
The beauty of this facility is that if at any point your bank balance is very low and you need to make a withdrawal or you have a debit on your account that is higher than your bank balance, your latest flexi deposit will be broken to the extent of extra amount required, your debit will be done as required, and the remaining flexi deposit will continue for the stipulated tenure as required.
For example, if you have Rs. 7,000 bank balance, and you have a debit of Rs. 10,000, then your last Flexi Deposit will be broken to the extent of Rs. 3,000 and the remaining Rs. 22,000 will continue to earn interest until it matures. This is if the bank follows the last-in-first-out rule. This is beneficial as your first FD continues for the longest tenure possible, earning the highest interest available.
Some banks offer a lowest denomination of Re. 1 i.e. you can split off even a single rupee from your FD.
Others offer a minimum split of Rs. 1,000, so for example if you only need Rs. 800, it will necessarily break Rs. 1,000 out of your FD and transfer it to your savings account.
Different banks have different rules, which you will need to check in detail before going in for the flexi deposit / auto sweep facility.
This is also known as the auto sweep in facility, because when the balance in your savings account crosses a certain amount, that amount is automatically swept into an FD, on which you earn bank FD rates of interest.
Different banks offer different types of this facility (for example, a flexi deposit is different from an auto sweep in facility) and each bank has its own rules for what it offers.
What is an Auto Sweep In Facility?
The sweep in account is almost like the opposite of a flexi deposit account.
In this facility, you open a savings account, then fix a minimum amount that should remain in your savings account. Any time your balance exceeds this figure, the extra amount will be swept into an FD.
For example, some banks stipulate a minimum savings balance of Rs. 10,000, and any amount above this is swept into the FD account, in multiples of Rs. 5,000. The amount earns interest as per the tenure that it remains with the bank, subject to a maximum of 1 year in some bank cases, or even 5 years in others.
It is not advisable to let this kind of FD go on for more than a year, as you have better investment options that can give you returns based on your goal requirements.
So note the main difference between the flexi deposit and the auto sweep facility is that the auto sweep is automatic transfer from your savings to the deposit account, but the flexi deposit is not, you need to fill the forms and specify amount and tenure yourself.
What should you keep in mind with both these facilities?
The first thing you need to check, considering that these facilities are offered by banks, are the charges. Some banks will penalize you if you break an FD early by deducting 1% of the interest earned even for the period that you remain invested. For example, if you have a deposit where you have stipulated a tenure of 6 months earning 7% p.a., and you break it in 3 months and the 3 month rate is 5% p.a., does the bank give you interest on this FD at the rate of 5% p.a. or will it impose a 1% penalty and give you interest at the rate of 4% p.a.? this is to be checked if you are using the flexi deposit facility.
For the sweep in account facility, check if your bank will penalize you if your savings account balance falls below the stipulated amount.
Secondly, if you conduct a high number of transactions from your savings account, you might not find it useful to have a sweep in facility.
Thirdly and possibly most importantly, the flexi deposit is useful if your bank offers LIFO and not FIFO i.e. it breaks the youngest (and therefore lowest interest earning) FD first, and leaves the oldest FD (earning the highest interest) alone as long as possible.
A flexi deposit is nothing but a bank deposit that offers you both higher rates of interest as well as total flexibility to break the deposit. The intention behind using this facility is to not compromise on your money's liquidity and at the same time benefit from higher returns.
For example, IDBI bank offers a facility wherein you can set an exact amount to be taken from your savings account on a monthly basis eg. Rs. 2,500 per month. This is to be locked into a flexi deposit for a certain tenure, which also is decided by you.
So for example, say you started in January 2012 and stipulated that Rs. 2,500 should be deposited from your savings account into a flexi deposit every month, for 12 months. So every month from January to December 2012, Rs. 2,500 will be deducted from your savings account, and deposited into your flexi deposit account as individual flexi deposits.
These deposits will earn whatever the banks rate of interest is on a one year deposit, if the tenure you have specified for each deposit is 1 year. Please remember that interest is taxable.
What is the key benefit of a flexi deposit?
The beauty of this facility is that if at any point your bank balance is very low and you need to make a withdrawal or you have a debit on your account that is higher than your bank balance, your latest flexi deposit will be broken to the extent of extra amount required, your debit will be done as required, and the remaining flexi deposit will continue for the stipulated tenure as required.
For example, if you have Rs. 7,000 bank balance, and you have a debit of Rs. 10,000, then your last Flexi Deposit will be broken to the extent of Rs. 3,000 and the remaining Rs. 22,000 will continue to earn interest until it matures. This is if the bank follows the last-in-first-out rule. This is beneficial as your first FD continues for the longest tenure possible, earning the highest interest available.
Some banks offer a lowest denomination of Re. 1 i.e. you can split off even a single rupee from your FD.
Others offer a minimum split of Rs. 1,000, so for example if you only need Rs. 800, it will necessarily break Rs. 1,000 out of your FD and transfer it to your savings account.
Different banks have different rules, which you will need to check in detail before going in for the flexi deposit / auto sweep facility.
This is also known as the auto sweep in facility, because when the balance in your savings account crosses a certain amount, that amount is automatically swept into an FD, on which you earn bank FD rates of interest.
Different banks offer different types of this facility (for example, a flexi deposit is different from an auto sweep in facility) and each bank has its own rules for what it offers.
What is an Auto Sweep In Facility?
The sweep in account is almost like the opposite of a flexi deposit account.
In this facility, you open a savings account, then fix a minimum amount that should remain in your savings account. Any time your balance exceeds this figure, the extra amount will be swept into an FD.
For example, some banks stipulate a minimum savings balance of Rs. 10,000, and any amount above this is swept into the FD account, in multiples of Rs. 5,000. The amount earns interest as per the tenure that it remains with the bank, subject to a maximum of 1 year in some bank cases, or even 5 years in others.
It is not advisable to let this kind of FD go on for more than a year, as you have better investment options that can give you returns based on your goal requirements.
So note the main difference between the flexi deposit and the auto sweep facility is that the auto sweep is automatic transfer from your savings to the deposit account, but the flexi deposit is not, you need to fill the forms and specify amount and tenure yourself.
What should you keep in mind with both these facilities?
The first thing you need to check, considering that these facilities are offered by banks, are the charges. Some banks will penalize you if you break an FD early by deducting 1% of the interest earned even for the period that you remain invested. For example, if you have a deposit where you have stipulated a tenure of 6 months earning 7% p.a., and you break it in 3 months and the 3 month rate is 5% p.a., does the bank give you interest on this FD at the rate of 5% p.a. or will it impose a 1% penalty and give you interest at the rate of 4% p.a.? this is to be checked if you are using the flexi deposit facility.
For the sweep in account facility, check if your bank will penalize you if your savings account balance falls below the stipulated amount.
Secondly, if you conduct a high number of transactions from your savings account, you might not find it useful to have a sweep in facility.
Thirdly and possibly most importantly, the flexi deposit is useful if your bank offers LIFO and not FIFO i.e. it breaks the youngest (and therefore lowest interest earning) FD first, and leaves the oldest FD (earning the highest interest) alone as long as possible.
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