What started off as an institution for the public with basic plans like savings account, fixed deposit and recurring deposit have now spiced up things by introducing newer features in a variety of packages. A flexi bank account is one such thing.
What are flexi bank accounts?
As the name suggests these bank accounts are flexible in the sense they give you the higher interest of a fixed deposit and the liquidity of a savings account.
Your flexi account will allow you to meet your regular cash needs based on which you could set your limits and transfer the remaining amount to your term deposit and get higher interest. And guess what all this happens automatically once you set the rules.
For example, in a flexi account of Rs 1 lakh (Rs 100,000) for a year your flexi deposit will have Rs 70,000 earning you a 5 per cent interest or Rs 3,500 every year.
The remaining Rs 30,000 would remain in your savings account waiting to meet your everyday needs and at the same time earning 3.5 per cent interest or Rs 1,050.
And if you issue a cheque for Rs 35,000 the excess amount of Rs 5,000 would be transferred into your savings account from your flexi deposit with no charge which depends on your bank terms.
Types of flexi bank accounts
Many banks offer different types of flexi bank accounts and each have its own rules regarding the same. Broadly there are two categories: one, flexi fixed deposit account (FD) and two, sweep account.
How does flexi fixed deposit work?
Simply put a flexi fixed deposit helps you withdraw funds whenever you require it. To begin with you can open a fixed deposit ranging between Rs 25,000 to Rs 50,000 for a specific term depending on your bank. There is also the option of enjoying a zero balance savings account for a higher fixed deposit amount.
The benefit of a flexi fixed deposit comes into play when you require more funds than what you have in your savings account. In such a situation your bank will withdraw from your flexi fixed deposit the excess amount required and deposit the same into your savings account.
And if you have more than one fixed deposit then the bank will work on 'First In, First Out' or FIFO basis thus breaking the first fixed deposit opened.
As said every bank has its own set of rules regarding flexi fixed deposit schemes. For example if you hold a flexi fixed deposit account with IDBI Bank or ABN AMRO the fixed deposit is split into units of Rs 1,000.
This means that if you want to withdraw Rs 16,200 these banks will transfer Rs 17,000 from your flexi fixed deposit into your savings account. However, in the case of HDFC bank the fixed deposit is split into units of Re 1 thus transferring only the exact amount needed and leaving the balance in your flexi fixed deposit to continue to earn interest as per the bank's rate.
How does sweep account work?
Also called savings plus account the sweep account is the reversal of a flexi fixed deposit. To begin with you should open a savings account, fix a minimum limit and the balance that exceeds this limit in your savings account will be automatically transferred into your fixed deposit.
ICICI Bank's sweep account facility requires a minimum balance of Rs 10,000 in your savings account the excess of which will be transferred to your fixed deposit in multiples of Rs.5, 000. The sweep facility at State Bank of India (SBI) with a minimum of Rs 10,000 creates a new fixed deposit whenever there is a transfer of money over and above Rs 10,000. Canara Bank's sweep facility has a minimum ceiling of Rs 15,000.
Pros and cons of both these accounts
A flexi fixed deposit account gives you the best of both worlds that is the higher interest of a fixed deposit and the liquidity of a savings account.
Perhaps the biggest drawback of this system is that it can give you benefits only for a short term. These types of accounts are only for a year as its main aim is to give you liquidity and higher interest.
Most banks penalize the customers if their savings account falls below the predetermined level. And there is a pre-closure charge in case of premature closing of these accounts.
The flexi fixed deposit does not allow reverse sweep facility that is funds from your savings account cannot be transferred into your flexi fixed deposit whereas reverse sweep is possible in sweep account.
There is a limit to the overdraft and there are a minimum number of months for the money to remain in the account. Lastly, choosing to open these accounts would mean parking all your funds in one place and hence no diversification of your portfolio.
How should you decide which one to choose?
If you are someone looking to make the idle money in your savings account to earn higher interest then this flexi schemes might be helpful.
However, before you opt to open them you should carefully analyze your financial requirements as you might be penalized for falling below the predetermined levels or pre-closing of accounts. You should also take into account the drop in interest rates for fixed deposits from time to time.