Cumulative FDs and Non-Cumulative FDs - An Overview

Fixed Deposit is considered one of the safest investment instruments. Millions of Indians invest in it as it provides guaranteed returns. Banks and non-banking financial institutes provide different types of fixed deposits, but the main types that you may hear while opening an FD account are cumulative FD and non-cumulative FD. These two types bifurcate as per how you select to receive your interest pay-outs.

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However, if you are thinking about which bank is the best for a fixed deposit? And which type of interest pay-out should you select, we are here providing a brief description of the differences between cumulative FD and Non-Cumulative FD.

What is Cumulative FD?

The meaning of cumulative is accumulation. In the same manner, cumulative fixed deposits mean a fixed deposit where the interest is collected or accumulated till the maturity period ends. The interest that you earn in one year or throughout one cycle of this FD is added or reinvested to the previous principal amount and thus it increases the principal amount. In this way, it pumps up the interest earned. The power of compounding here is used at its best. You get the amount of maturity as soon as your FD matures, which is the sum of your initial deposited amount and the interest that is accumulated.

Who Should Invest in Cumulative Fixed Deposits?

This type of fixed deposit scheme is suitable for those who do not depend on income through interest. Generally, people with a stable job and income and people who are earning well through their business invest in this.

So, if you want a particular amount in the future, and can easily manage without a particular interest regularly, you can consider cumulative FD.

What is Non-Cumulative FD?

A non-cumulative FD is a type of fixed deposit where the accrued interest is paid on regular basis to the depositor. The interval in which the interest is paid may vary from quarterly to monthly and sometimes to semi-annually. In this way, a non-cumulative FD provides a regular pay-out to its investors as the interest is not kept by the bank. The rate of interest offered by banks for non-cumulative FDs is lesser as compared to cumulative FD as the power of compound is not utilized here properly.

Who Should Invest in Cumulative Fixed Deposits?

Non-cumulative fixed deposits are the best for pensioners, housewives, freelancers, and those who want regular income through their savings.

Difference Between Cumulative and Non-Cumulative Fixed Deposits?

The below-mentioned table compares the features of both these types of fixed deposits, let us see:


Cumulative FD

Non-Cumulative FD

Frequency of Interest Pay-out

Upon maturity

Can be monthly, annually, half-yearly, quarterly, and according to the choice of the investor.

Interest Accumulation

The interest is accumulated across the tenure of FD

The interest is not accrued as it is paid out at regular intervals.

Total Earned Interest

The interest that is earned is higher as the interest that is yielded across the tenure is accumulated and added to the principal amount for further compounding.

The earned interest is lower and the pay-out amount gets decreased when the frequency of payment gets higher.

Periodic Income

There is no provision of periodic income.

The periodic income is yielded throughout the tenure.

Best Suited For

This type of FD is best suited for the investors who are looking for growth in the savings, and for creating a large corpus for achieving their investment goals.

The investors are looking out for the funds for day-to-day expenses without making any dent in the principal amount.

Steps to Maximize Returns on Fixed Deposits:

The returns from FD can be maximized by investing in cumulative fixed deposits. This is because the interest earned here is reinvested regularly. Therefore, the interest that you accrued in the initial cycle of FD is added to the principal amount. This consecutively leads to an increase in the principal amount. Whereas, the interest accrued in the second cycle of FD is calculated on the increased principal amount that again leads to a higher interest. This pattern continues until the maturity of your FD. So, at the end of the tenure of fixed deposit, the interest gets higher than your non-cumulative FD and hence the returns are swelled to the maximum.

Cumulative FDs Vs. Non-Cumulative FDs, Which One Is Better?

The choice between these two modes of interest pay-outs can be as per your preference. If your purpose of investment is to add something to your existing income or get a pension after retirement, then you must select a non-cumulative fixed deposit.

However, if your purpose of investment is not to look for any add-on but to multiply your existing savings at a good exponential rate, you can opt for a cumulative fixed deposit without any second thought.

You may like to Read: SBI FD Interest Rates

An Example:

Suppose, you deposit Rs. One Lakh in a fixed deposit for a tenure of five years with an 8.5% rate of interest and you selected monthly compounding frequency in the cumulative FD. In such a situation, you will get Rs. 1,52,730 upon maturity. However, if you select quarterly compounding for Rs. One Lakh and with the same rate of interest, you will get Rs. 1,52,279 upon maturity. If you select half-yearly compounding for this principal amount and the same rate of interest, you will get Rs. 1,51, 621 upon maturity. If you select yearly compounding frequency on the same principal amount and with the same rate of interest, then the amount that you will get at maturity would be Rs. 1,50,365.

However, if you opt for non-cumulative FD for a tenure of five years and on yearly basis at the rate of interest of 9.25%, you will get Rs. 1,46,250 upon maturity. The interest earned is Rs. 46,250. On a half-yearly, quarterly, and monthly basis for the same principal amount with the same rate of interest and same tenure, the maturity amount will be Rs. 1,45,250, Rs. 1,44,750, and Rs. 1,44,500 respectively.

The Bottom Line!

Finally, it is up to you which scheme you select for your investment in a fixed deposit. You can choose a type as per your needs.

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