Money
Kotak offers 7% on its ActivMoney fixed deposit but here’s the catch
Summary
Auto sweep option ensures there are no withdrawal charges for closing FD early but scheme comes with riders.For someone who has idle money lying in their bank account, Kotak Mahindra Bank’s new proposition ‘ActivMoney’ looks enticing. Savings accounts typically offer an interest of 3.5% per annum, whereas fixed deposits (FDs) can deliver returns as high as 7% annually. ActivMoney lets you earn higher interest rates of up to 7% on your savings account without your having to worry about early withdrawal charges associated with FDs.
Here’s how it works: The money in your savings/current account beyond a certain threshold ( ₹25,000 set by default) is automatically transferred into a FD account, thereby generating a higher interest rate. This is known as the sweep-in facility. In case the account holders want to use this FD funds at a later date, they are free to do so without paying any early withdrawal charges. The bank will use the sweep-out facility to automatically deduct funds from the FD account and transfer it to the savings account.
Banks typically charge a penalty for early withdrawal from FD accounts. But, here you get the flexibility of a savings instrument that also offers higher interest rates. Plus, there is no burden of early withdrawal charges. So what’s the catch?
The interest rate in this scheme depends on how much time you hold the money in the FD account. Let’s say you put some money aside in FDs using the sweep-in facility but decide to opt out before the fixed tenure. In such a case, the interest you will be entitled to is not for the entire tenor but only for the days you remained invested in the FD. In some cases, the interest rate in FDs might even be lower than the savings rate if you withdraw the funds early.
For instance, Kotak’s ‘ActivMoney’ offers an interest rate of up to 7%. But account holders are entitled to the 7% interest only if they hold the amount in the FD for at least 180 days. Note the fine print of ‘up to 7%’ for the scheme. It indicates that 7% is the maximum interest you can get under the scheme. Account holders who actively use the sweep-in and sweep-out functions will get lower interest rates if they don’t stay put for the entire tenor. For tenors below 180 days, the interest rate ranges between 2.75% and 4.25%.
To be sure, these instruments are not new to the market. The facility to transfer money from savings/current accounts to fixed deposits and vice versa using the ‘auto sweep’ function is currently offered by most banks such as Axis, HDFC, ICICI, IndusInd, and many non-banking financial companies.
Another caveat is that Kotak can change the FD rate anytime. The active money term deposit will be booked for 180 days at the prevailing interest rate.
Central banks around the globe, including the Reserve Bank of India, have been raising rates to control inflation. This means that once the rate hike cycle reverses, the interest rate on the FDs might come down.
Historically, all banks including Kotak have been bringing down interest rates on their savings accounts. For instance, Kotak launched a savings account facility in 2017 by offering 6% interest. Subsequently, it was brought down to 3.5% for deposits under ₹1 lakh and 4% for deposits of more than ₹1 lakh in 2020. The launch of ActivMoney is seen as another way to attract people into making deposits with the bank.
An alternative to using the sweep-in FDs is to park your excess money with liquid mutual funds. Liquid funds offer yields that are comparable to FD rates. Unlike FDs, you can redeem your amount anytime without forgoing the yield. Keep in mind that liquid funds charge a small exit load if it is redeemed before a week. Also, it takes 24 hours for the withdrawal request to get processed .FDs, though, can be accessed instantly.
Another benefit of liquid funds is that the short-term capital gains charged on redemption can be set off against short-term or long-term capital losses against other investments.
