Sweep Account

Introduction

Earning interest from the excess money can be done through a Sweep account. When the customers' account balance gets above the average limit they set, the excess amount gets transferred to a high-interest-bearing money market account. The excess money is automatically swept into the money market account for investment purposes. The amount within the threshold limit gets 4%–6% interest rates, whereas the excess amount invested in the money market gets 8%–9% interest rates.

Sweep Account: Definition

A sweep account transfers funds into a safe, higher interest-earning investment option at the close of the business day. Sweep accounts lower cash withdrawals by investing in the immediate availability of higher-interest accounts. Banks do not provide this type of service free of cost, instead, they charge fees that make the sweep less attractive on a net basis.

A sweep account provides customers with the greatest amount of interest with the minimum amount of personal intervention by transferring money into a high-interest account. Sweep accounts ensure that the money is not sitting idly in a low-interest account when it can earn higher interest rates in better investment vehicles.

Some banking institutions charge flat fees, while others charge a percentage of the yield, resulting from the higher returns from investment vehicles, therefore, businesses and individuals have to keep an eye on the cost of sweep accounts.

Sweep Account: Explanation

A sweep account is a brokerage account that is designed to utilize the excess cash in the account by investing in investment options that would gain better returns than the savings account interest rate. Customers give instructions to the banks to maintain their accounts, in return, the banks charge a higher fee. When the excess amount is invested in the money market, there are equal chances of higher or lower returns when compared to the savings account returns. Banks provide financial advice to their clients on where they can invest their excess money, or clients themselves can decide on the same. When the amount falls short in the main account, the proceeds earned from the investment in the money market can be used to maintain the threshold limit in the account.

Difference Between Sweep Account and Business Sweeps

The sweep accounts are used by banks to store customers' funds until the customers decide to invest the money. Business sweep accounts are used by small companies with large cash flows. The banks allow the company to earn interest on excess cash reserves and ensure that they have enough money in hand to pay for business expenditures.

Example of Sweep Account

Mr. A chose to deposit money in the sweep account, where the savings account has a threshold limit of Rs. 5000. The savings account interest rate was 2% per annum. On the first of December 2020, he had Rs. 2000 in his account and continued to earn interest on that year. On the first of January 2021, he deposited Rs. 2000 in the account. The total amount in the account is Rs. 7000 and Rs. 2000 is the excess amount from the threshold limit. The excess amount will be automatically invested in the money market.

Characteristics of Sweep Account

The following are the characteristics of a sweep account −

• A sweep account is also known as an auto sweep account.

• A sweep account is a smart way to regularize business people’s daily cash flow balances.

• ⦁ The customers’ excess money is automatically transferred into the sweep account for the money market investment.

• The financial advisors and the customers predetermine the money to be transferred.

• A sweep account helps the customer to earn some return on investment, higher than the regular fixed deposit interest.

Advantages of Sweep Account

Let us understand how the excess cash is efficiently used in the sweep account by pointing out the advantages below −

• The excess amount is transferred automatically as per the customer’s requirement.

• The threshold limit is maintained in the savings account.

• The proceeds from the investment are automatically used to maintain the minimum requirement of the account balance when the funds are less in the savings account

• ⦁ The customers can earn interest in their savings account and excess money from the threshold limit will not sit idle in the account rather it can be invested in the money market.

• The customer can liquidate the money invested in this scheme.

Disadvantages of Sweep Account

There are a handful of factors that explains the disadvantages of the sweep account below −

• The risk involved in the money market is very high, and customers have to be very keen on investment.

• Banks charge a higher amount of fees to maintain this account as it is a special facility provided to the customer.

• There is a possibility of lower returns compared to the normal interest amount in the savings account for which customers have to take financial advice before investing their money in this type of account.

• Customers have to pay a huge penalty for breaking the account before completing its period or tenure.

Conclusion

Sweep accounts are a convenient way to use surplus cash sitting idle in a low-interest earning account. Mank financial institutions and banks offer auto-sweep features, authorizing automatic transfers from a savings account to a sweep account at the end of a business day. Even though sweep accounts are considered to be advantageous to individuals and businesses, the respective investors have to do their homework on fees and penalties charged by banks, by getting financial advice before opening a sweep account.

FAQs

Qns 1. Are sweep accounts safe?

Ans. They are considered safe but involve risk with respect to the terms and conditions. You will have to check all the aspects to know better.

Qns 2. How to withdraw money from a sweep account?

Ans. The clients can do it through an online method or can even contact the bank directly. It depends on the situation most likely.

Qns 3. Why are sweep accounts useful?

Ans. It is an easy way to ensure that money is not sitting idle in the bank, instead it is earning a return. This makes it profitable for the clients.