Often we put money in our savings or a brokerage account that remains unused for a long time and does not earn any returns. A sweep account transfers the unused money to a high interest earning investment option during the closure of each business day.
Sounds interesting? Keep scrolling to learn more about the types of sweep accounts and how they work.
As the name implies, a sweep account ‘sweeps’ or transfers excess funds from one brokerage or bank account to another. Such accounts automatically transfer money exceeding a certain threshold limit to a higher interest-earning investment account. This transaction takes place at the end of every working day.
Usually, this surplus cash is transferred into a money market fund. A sweep account also helps lower the chances of cash drag by using higher-interest accounts. Depending on the type, a sweep account can transfer money within the same institution (internal sweep) or another (external sweep).
A customer receives better interest in using the automatic mode of sweep accounts. In addition, the surplus amount is automatically transferred by the end of the working day. This makes it a hassle-free process for customers.
To create a sweep account, traders must set a threshold limit in their checking account. When the account balance exceeds this threshold limit, a ‘sweep transfer’ takes place. In addition, one must create another account, which acts as a destination for these sweep transfers.
Investment options like higher interest savings or money market accounts serve well as sweep accounts. Sweep accounts also come in handy for easy and faster repayment of loans. Here, the surplus amounts help to repay loans instead of adding them to investment accounts.
So, what happens when your checking account balance falls below the threshold limit?
In scenarios like this, the sweep account system will sweep in the low value from the investment account to your checking account.
Based on the functions, we can classify sweep accounts into the following:
You can invest the surplus balance of your checking account in a money market sweep account and increase your earnings. When the balance in your checking account falls below a limit, funds from your sweep account will automatically be transferred into the checking account.
This type of sweep account enables faster repayment of loans using the surplus amount in your checking account. Therefore, a loan sweep account is of great help for business owners to clear off their debts with timely repayments.
The procedure to open a sweep account may vary from one bank to another. However, the following are some general steps for investors opting for a sweep account:
Sweep accounts are of great help for both business and personal use. It ensures your extra money does not stay idle in just your savings account. Instead, they are transferred to accounts with higher interest rates.
Find the functions of sweep accounts below:
The benefits of sweep accounts are as follows:
Let’s again take Rahul’s sweep account example to understand how they work.
Rahul has a savings account of Rs.20,000 with a 4% interest rate. He also opened a sweep account and set a Rs.30,000 threshold limit on his savings account. Since the current balance in Rahul’s checking account is below Rs.30,000, there is no transfer from his checking account to his sweep account.
Rahul deposited Rs.40,000 to the checking account on July 31. This changes his current account balance to Rs.60,000. A sweeping transfer will occur if his current balance exceeds the threshold value.
To evaluate this surplus amount, the sweeping system takes the difference between the current balance in his checking account and the threshold limit into consideration. The extra amount of Rs.30,000 fulfils the sweeping purpose.
If Rahul withdraws Rs.40,000 from his savings account, his account balance will drop to Rs.20,000. Since it is Rs.10,000 less than the set limit, there will be a sweeping transfer from Rahul’s investing account to his checking account.
As the name suggests, personal sweep accounts are for individual use. In contrast, business sweep accounts are for companies and businesses.
A personal sweep account allows the owner to park funds until he decides on further reinvestments. The owner may conduct a ‘sweep transfer’ to a money market fund to earn better interest than usual accounts.
Companies usually have much larger cash flows and need to use business sweep accounts. These businesses keep a minimum limit on their checking accounts. The sweeping occurs when the amount rises above it. This exceeding amount can also be used to repay debts. Even when the market is down and cash reserve falls short, money from a sweep account can be a saviour.
Remember to consider these points:
Sweep Accounts are a convenient way to use surplus amounts sitting idle in a low-interest earning account. Many banks and financial institutions offer auto sweep features. This enables automatic transfer from a checking account to a sweep account at the end of a business day. Thus, taking off the owner’s stress of missing a transfer.
However, like every banking system, sweep accounts have pros and cons. So, investors must do their homework on penalties and seek financial advice before opening a sweep account.
Ans. To open a sweep account, you need a premium account with a quarterly or minimum average balance ranging from Rs. 25,000 to Rs. 1 lakh. You are also eligible for a sweep account if you have a minimum fixed deposit of Rs. 25,000. However, these values vary from one financial institution to another.
Ans. Some extra fees might be charged for sweeping money from checking accounts to sweep accounts. In addition, you may face penalty charges when making a premature withdrawal from sweep accounts. Since sweep accounts are special facilities that some banks offer, costs to maintain these accounts are usually high.
Ans. Sweep accounts require a minimum balance for their activation. However, you can open a zero balance account without making any initial deposit to activate it. A sweep account helps to invest the surplus cash. At the same time, a zero balance account strengthens cash balances from other accounts.
Ans. Sweep Accounts hold dividend payouts and new deposits waiting for reinvestment. It also reinvests surplus funds from your checking account and gains when you sell your securities.
Ans. When funds in your checking account run lower than the threshold limit, a transfer occurs from the sweep account to the former. This facility is known as sweep-in.
This article is solely for educational purposes. Navi doesn't take any responsibility for the information or claims made in the blog.
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