When it comes to investing, one may have a variety of instruments available, but we all know that cash is king. Investors want to maintain liquidity to capitalize on opportunities when they arise or to cover expenses in dire times. To address this, many banks offer an auto-sweep feature, where cash exceeding a predefined limit is moved to an account similar to a fixed deposit but with the flexibility to liquidate the cash deposits when transactions are made and there is insufficient money in the savings account.
This option seems very attractive as it offers the interest rates of a fixed deposit along with some flexibility and liquidity. However, there are a few things we should be aware of regarding this scheme. Speaking from personal experience, things did not go as planned. I initially liked this plan and used the auto sweep or multi-option deposit frequently, but later I realized that I never viewed it as a fixed deposit account. Instead, all my expenses and investments were being made through my auto-sweep-enabled savings account. After analysis, I realized that I never achieved the fixed deposit interest rates, as the money was rotating too quickly and penalties were imposed because the money was swept up and utilized before maturity. It seemed like just another savings account with many more transactions. This might be useful for some people, but not for those like me who frequently move funds in and out.
There are other debt instruments available that might suit my requirement of holding cash for a certain period of time without any penalties or restrictions on early withdrawals. Some of the options I am investigating include liquid funds and very short-term bonds.