Fixed Deposit is an easiest and oldest product in financial market. We recall the days, when we ourselves or our parents were used to visit the bank branches to park their saving in FD accounts to earn better rate of interest. The same practice is still being adopted by majority of investors even today.
Now-a-days most of the bankers have come up with the functionality called as auto sweep to FD. One needs to sign up the functionality with the bank to avail it. The functionality will transfer any excess money in saving account beyond the specified limit to the Fixed deposit account of generally one year duration. In case, you need withdrawal anytime, the amount gets automatically credited back to your saving account from your Auto-FD account.
Sounds very interesting way to earn extra interest on your idle money! No need to visit branches! no need to do planning for fixed deposit and withdrawal!
Let’s analyse does it really benefit the account holder and this ease of transaction really works for you. We did a survey with some persons who are availing this facility and got following responses.
- It’s the best way, I need not to keep an eye on my funds and my money keeps growing by itself.
- As on date, I cannot recall, how much money is parked in my FD account.
- I cannot recall the amount, which has been a year’s old. I keep transacting.
- I am not aware of it’s income tax implications.
- Is TDS deducted from my FD account, I believe it is an online system and one can view those details whenever required.
We hope, if you have availed this auto sweep FD option, many of the above statements will hold good for you too.
- So, what’s wrong in it.
Let’s compare this with old system, wherein you visit the branch to place request for FD, or you yourself place online request for making a fixed deposit. The very thought of parking some amount in FD for a specified tenure helps you foresee the amount and tenure being parked in FD account. And this thought process will always help you better plan your finances. The chances of breaking that FD before tenure expiry gets eliminated by multifold times with this though process. The moment you enter the comfort zone of ease of transaction, it hits your planning and your aren’t able to hold those FD for bigger tenures. Everyone knows the bankers doesn’t offer good interest rates in shorter duration FDs.
The above hold true for many but many would still be keeping a good track of the FDs made through this option and must have planned it for some goals. Does it still make a good option for them?
In the auto system, even though you have planned well but a good part of FDs will still be prone to shorter period interest rate which ranges between 4-6% only. In contrast to this, if one checks the track record of Liquid mutual funds, the investor’s money has earned more than the one year FD interest rate, for the amount invested even for single day.
- How does taxation angle differs between FD and Liquid mutual funds?
Both are prone to taxation, however for a person in tax bracket of 30%, mutual fund route will rather save about 3% in taxation. If one stays invested in Debt or Liquid mutual funds for more than 3 year, one can avail the indexation benefit which helps eliminating the tax burden on appreciation significantly.
- Does it mean, this product is suitable for persons in higher tax bracket only?
Given the benefits, it gives better post tax return and better way of handling the finances for an income tax assessee of any tax bracket.
- Does the mutual funds investments also offers ease of transaction like auto bank FDs.
Yes, there are many mutual funds available, wherein you get the money transferred to your saving account within 30 minutes of placing redemption request.
- What are the other benefits of parking the money in liquid mutual fund accounts?
Depending upon the horizon of amount invested, one can sweep the money parked in liquid account to other debt or equity mutual funds very easily and also enjoy the ease of switching money easily to grab investment opportunities.
- Are liquid funds safe in comparison to FDs?
Liquid funds generally invest into money market instruments of very short duration. Such instruments are usually issued by banks and government organisations and are used by them to handle their liquidity. These funds are considered very safe from credit risk and market risk.
“Powering your saving account with an online liquid fund account helps you earn more and plan your finances well in comparison to auto sweep FD account.”