Now let us analyse this particular service offered by different other banks also. Kotak Mahindra Bank is not just the first one, but then yes, 7% interest, it looks very attractive given the fact that the interest rates have gone up and there is a pause right now. But then a sweep fixed deposit, a very smart way to manage your money, but then it is something account holders should really opt for or there are better strategies as well. What would you suggest?
Indians are over reliant on the humble savings account and the humble fixed deposit and they do not participate enough in the securities market. So, how they manage their savings and deposit becomes important and that is where products like these can help. Your money gets automatically parked into deposits. You do not have to do anything and you get a higher rate of return I think that is very important and there is so much convenience built into these products because the deposits get created automatically and they get liquidated automatically and you are getting that higher rate of return.
I mean, this is fantastic for people who do not want to be actively managing their deposits, so it is great for them. But for somebody who is actively managing their deposits, who is aware of what is happening in the market, where the best rates are for them maybe there could be a slight advantage in creating the regular fixed deposits where the interest rates could be slightly higher.
The biggest catch in this particular service is the period where you have to be locked in to gain the benefit of the higher interest rate. Otherwise, if you want money before that, just the fact that you have liquidity, you might not earn anything if you are withdrawing the money before the specific tenure.
Yes, and in that it is not different from the regular fixed deposits where if you redeem within three or four months you get the rate of return that is applicable to a savings account in most cases.
So, in that sense, it is not different. You really need to understand why you are creating that deposit, how long do you wish to remain locked in because there are tenors being offered on regular FDs where the rates are slightly higher.
So, typically, let me give an example, the rates on five-year FDs tend to be higher sometimes than short-term FDs. So, therefore, if you want to remain locked in for longer periods of time you can get better returns.
But if you are not clear what you want to do, if you are starting out, you are not clear on the rates of return, you do not know how to create an FD so that is where the product gives you a lot of convenience. The sweep in FD gives you a lot of convenience and you can make use of that.
It is very clear if you want to just park your money and on the benefit of high interest rate, there are better options. But if you are someone who also wants liquidity at the same time, manage your savings account really well, you might as well use this sweep fixed deposit strategy. Can we create a contingency or an emergency fund with a sweep fixed deposit or would you suggest one to have a separate liquid fund for that wherein whenever you need money at least 24 hours it will take to come into your account?
This is an interesting question and it all boils down to how disciplined you are as a saver or a depositor. If you are somebody who likes to max out your spendings, then perhaps this might not be a great option because you should not ideally touch your contingency savings in any situation, that money is meant only for emergencies and if it is available to you every day, then there is a good chance that you might spend it. In that sense, I think a regular FD might help. But again, if you are just starting out, trying to set some savings earn higher returns, this is all good. But best practices are always best practices. A contingency fund that is not easily within your grasp, I think that is best for you.
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