Get The Best Of Both Worlds

Hybrid accounts offer liquidity, high returns and capital protection. In these troubled times, they are a flexible in-out instrument for your funds

How To Get More

Maintain the minimum balance in respective accounts while opting for sweep-in or auto sweep facilities. This way you will not have to pay any service charges for them

In an auto sweep facility, keep a reasonable threshold limit. This will prevent frequent breaking of fds and you will get a higher rate of return from them
In a sweep-in facility, try not to link an FD that’s nearing maturity

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While the equity markets are passing though a volatile period, banks look attractive as places to park surplus funds

"Smart use of facilities offered by hybrid accounts can make them flexible instruments for meeting longer-term as well as immediate needs"

Savings acc-ounts offer unparalleled liquidity, but returns of just 3.5 per cent a year. Fixed deposits (FDs) give higher returns and capital security, but are not as liquid as savings accounts. And, any premature withdrawal means losing out on interest. So what do you do?

Enter hybrid accounts. They offer liquidity, high returns and capital protection. Most banks offer them under different names (see Revolving Doors).

The use

Says Pune-based certified financial planner Veer Sardesai: "Hybrid accounts have been around for a while. They have gained prominence now because many banks have started offering such facilities."

Hybrid accounts can be used for long-term as well as immediate needs. For long-term goals, such as a child’s education or buying a house, you should move away from riskier asset classes 2-3 years before you need the money. If you know exactly when that need would be, it is better to invest in a bank FD of the same duration. But this rarely happens. In reality, one never knows when money would be required. Usually, if there is an unplanned money requirement, an FD is broken, especially if there is no other source.

Such a situation can be avoided with hybrid accounts with sweep-in or auto sweep facilities. These facilities can also be used to create an emergency fund. "We frequently advise people that everyone must keep aside 6-8 months’ living expenses as an emergency fund," says Sardesai. With a sweep-in facility, excess funds above a threshold limit in a savings account can be automatically transferred into an FD and earn a higher interest rate.

Mother of invention

Earlier, a person had a savings account for liquid money and FDs for investment. In such a situation, every time he had to issue a cheque in excess of the balance in the savings account, he had to visit the bank branch to give instructions to break his FD. Says Seshan Ramakrishnan, head, liabilities products, HDFC Bank: "This was an inconvenience that customers could do without. At the same time, the bank had to manually process all such requests within the agreed turnaround time."

Thus, a hybrid product was created that helped the customer earn higher interest and issue cheques of amounts more than in the account without any manual intervention from the bank.

The working

These accounts work in two broad ways. One is the sweep-in facility, where a savings or current account is linked with multiple FDs in the same bank. HDFC Bank’s facility is a typical example. You would need a savings or current account and FDs that are to be linked, in the same bank. Any deficit in your savings or current account will be met by a withdrawal of an exact value from your FD. Since deposits are broken down in units of Re 1, you will lose interest only on the actual amount withdrawn from the FD.

The second way is the auto sweep facility. ICICI Bank’s Auto Invest Account facility is an example. All you need to do is mention a threshold limit. Any amount above the limit will be converted into an FD in multiples of Rs 5,000. The linked FDs are by default of one-year period or you can go for a period of your choice. Interest rates are as revised by the bank from time to time. Maturing deposits are renewed for a year or for a period of your choice at the interest rate prevailing on the date of renewal.

Your choice. "Each individual needs to choose a hybrid product depending upon his need and cash flows," says Ramakrishnan. For example, try not to use the sweep-in facility for an FD that is nearing maturity since the loss of interest on breaking it would be higher.

In the auto sweep facility, if more than one FD is linked, the last deposit made under the scheme will be used first to meet the shortfall. If this isn’t adequate, then the deposit made prior to the last deposit will be used, and so on.

Costs. These facilities do not cost extra under certain conditions. For example, to availyourself of HDFC Bank’s sweep-in facility without charges, you will have to maintain Rs 50,000 or more in your FD. If the level goes below Rs 50,000, service charges applicable on a savings or current account are levied. ICICI Bank’s auto sweep facility requires you to maintain Rs 10,000 in the linked savings bank account. With Bank of Rajasthan’s Flexi Fixed Deposits, you will need to maintain a minimum of Rs 10,000 in the FD, failing which you would need to pay Rs 100per quarter.

Getting the most. Use these tricks to get the most out of these facilities.

With an auto sweep facility, make sure you keep a reasonable threshold limit in the savings account so that your FDs are not broken regularly and you continue to earn higher returns on them.

Also, as Sardesai points out, "it becomes a bit difficult for a lay person to understand the bank statement if there are excessive transactions between the multiple accounts". Another thing to remember is that interest earned on these accounts is fully taxable in your hands. So, plan in such a way that the FDs earn more interest than the savings bank account.

Other options

In an emergency, you can take an overdraft against your FD. However, make sure the overdraft is not more expensive than breaking the FD. Also, getting the overdraft takes more time due to the increased paperwork involved. Look for banks that provide an instant overdraft facility against the FD.

People with higher risk appetites can move towards liquid mutual funds for shoring up emergency fund requirements.

Source:money.outlook.com