What is the Sweep Account?
A sweep account is a kind of bank or brokerage account in which if the account balance of the customer gets above the average limit set by the customers, then the excess amount get transferred to high interest bearing money market account.
Banks provide this special facility to customers by maintaining their accounts and as per the instruction given by the customers. They sweep the excess amount to the money market account and from there by investing in the money market. Customers can earn a return on their investments. The bank also provides a facility to the customers by giving them financial advice as to where they can invest, or the customers can by itself decide the same. The excess amount that is transferred to the sweep account can be easily liquidated. The customers generally try to invest them into the money market because the rate of return in this market is higher; also, the risk associated along with the returns can be there, but if the customers take good financial advice, then they can do wonders with the excess money left over in their regular accounts which they are trying to invest in the money market.
- These accounts automatically transfer the excess money into the sweep account to get it ready for the money market investment.
- The money that is being transferred is predetermined by the financial advisors and the customers of the bank.
- This account helps the customer to earn some return on investment, which is higher than the regular FD interest.
- It is also known as the auto sweep account.
- It is a smart way to regularize the daily cash flow balances for the businessmen.
How Does it Work?
The bankers well maintain the account, and as per the client’s requirement, the money automatically transfers to the account. Customers predetermine the average amount to be kept in the saving or current account, and any amount over and excess is invested in the money market. The excess amount in the sweep account is also easily liquidated. Sometimes there can be a situation that the amount falls short in the main account, and that time the proceeds which the customers earn form the investment in the money market can be used to maintain the accounts. The calculations and the adjustment should be made very carefully to maximize the utility of the mechanism of this special account type.
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Example of Sweep Account
Let’s say, Mr. Russell opted for a sweep account facility with the bank. He has a savings account that has a threshold limit of $ 5,000. The savings account interest was approx 2 % per annum. On 1st December 2019, he has $ 2,000 in his account, and on that, he has continued to earn a 2 % interest that year. On 1st January 2020, he deposited a cheque of $ 2,000 to the bank and so now the fund in the account is $ 7,000. The extra amount from the threshold limit, i.e., $ 2,000, will be automatically invested in the money market and by which Mr. Russell can earn a higher return on his investment compared to the savings account.
Difference between Sweep Account and Zero Balance Account
- In a zero balance account, there is no minimum balance requirement, but in the case of a sweep account, there is a minimum balance requirement to continue the account.
- The function of the zero balance account is to consolidate the cash balances of other accounts in a single entry for the clients. On the other hand, the sweep account helps to invest the excess money that is lying in the savings or current account of the customer to help them earn a higher return from the market.
- The zero balance account disburses all the money from its account at the day end and thus making it the balance zero. Whereas, a minimum amount is required at any point in time in case of the sweep account.
- This account transfers the excess fund automatically as per the client’s requirement.
- This account also helps the savings account to maintain the threshold limit.
- In case the funds fall short in the savings account, the proceeds from the investment are automatically used to maintain the minimum requirement of the account balance.
- By this technique, the customer can earn a steady interest in their savings account, and the excess money is not idle in the accounts. It is further invested in the money market.
- The money invested through this account in any investment schemes can easily be liquidated when required.
- The disadvantage of this type of account is that the customer has to be very keen on investment. The risk involved in the money market is very high.
- The fees to maintain the account is usually high since the bank is providing a very special facility to the customers.
- The customer should take financial advice before investing their hard-earned money in something like this because there can be a possibility of earring a less return as compared to the interest amount from the saving accounts.
- There is a huge penalty in breaking the account before the completion of its tenure.
Banks provide special facilities to the customers to ease out their burden from the complex investment situations. Still, the customers should very well understand all the terms and conditions of this facility. The money market returns are no doubt higher than the regular savings account interest, but one has to be very careful while investing in this type of account.
This article has been a guide to what is Sweep Account and its meaning. Here we discuss how does sweep account works with an example and features. You may learn more about financing from the following articles –