What is the Sweep Account?

Explanation

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 accountMoney Market AccountMoney Market Account is the account which receives all the interests from the instruments in the money market according to the agreed-upon terms. This account is separate from that of securities account, it only accounts for the proceeds.read more and invest in the money market. The excess amount transferred to the sweep account can be easily liquidated. Customers can earn a return on their investments. The bank also provides a facility to the customers by giving them financial advice on where they can invest, or the customers can decide the same by themselves. 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 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.

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Features

  • These accounts automatically transfer the excess money into the sweep account to prepare it for the money market investment.The money that is being transferred is predetermined by the financial advisors and the bank’s customers.This account helps the customer earn someThe return on investment formula measures the gain or loss made on an investment relative to the amount invested. The net income divided by the original capital cost of investment. Return on Investment Formula = (Net Profit / Cost of Investment) * 100
  • read more 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 business people’s dailyCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. read more cash flow balancesCash Flow BalancesCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. read more.

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 savings or current account, and any excess 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 where the amount falls short in the main account, and at that time, the proceeds the customers earn from 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.

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 had $ 2,000 in his account, and on that, he has continued to earn a 2 % interest that year. On 1st January 2020, he deposited $ 2,000 to the bank, and 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. Mr. Russell can earn a higher return on his investment than the savings account.

Difference between Sweep Account and Zero Balance Account

  • There is no minimum balance requirement in a zero balance account, 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 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 makes the balance zero. At the same time, a minimum amount is required at any point in time in the case of the sweep account.

Advantages

Disadvantages

  • The disadvantage of this type of account is that the customer has to be very keen on investment. The risk involved in the money marketMoney MarketThe money market is a financial market wherein short-term assets and open-ended funds are traded between institutions and traders.read more is very high.The fees to maintain the account are usually high since the bank provides 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 earning a lower return compared to the interest amount from the saving accounts.There is a huge penalty for breaking the account before completing its tenure.

Conclusion

Banks provide special facilities to the customers to ease their burden from the complex investment situations. Still, the customers should 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 must be very careful while investing in this type of account.

This article has been a guide to Sweep Account and its meaning. Here we discuss how a sweep account works with an example and features. You may learn more about financing from the following articles –

  • Final AccountsEscrow AccountClearing AccountCustodial AccountBancassurance