The magic of compounding is what attracts millions toward structured savings and investments. After all, everyone wants their money to grow safely and securely and create wealth through dependable instruments. And what better way to do that than through fixed-term deposits?
Fixed deposits allow investors to securely park their money for a specific term with a bank or financial institution. As the term reaches maturity, investors get their principal investment back with an assured interest amount. Therefore, for investors seeking low risk and assured returns, fixed deposits have always been the preferred investment option.
However, for many new investors, starting with fixed-term deposits can get confusing. Fixed deposit ROI (rate of interest) varies as per the financial institution offering the scheme and the term of the deposit. Furthermore, the two fixed deposit options—cumulative and non-cumulative—can complicate things and make investors more confused.
If you are also wondering whether cumulative or non-cumulative options have the same ROI and which one you should choose, then this piece is for you. Here is a look at both the fixed deposit options and a simplified explanation of cumulative ROI and non-cumulative ROI.
Fixed deposit cumulative rate of interest
Cumulative fixed deposits, as the name suggests, accumulate the total interest to be paid out on the principal amount and pay it on maturity. The interest value at the end of every term unit is calculated on the total amount of principal and interest accrued previously.
For instance, if an investor chooses a fixed deposit option for growing their investment of Rs. 10,00,000 (10 lakh rupees) with a 7% cumulative ROI for 2 years, then at the end of the first year they will earn an interest of Rs. 70,000. Things get interesting after that. This interest amount will get added to the principal amount, making the cumulative investment for the second year Rs. 10,70,000. In the second year, therefore, they will earn an interest of Rs. 74,900 (Rs. 10,70,000 x 7%).
Finally, on maturity, they will receive the total amount of Rs. 11,44,900 against the initial investment of Rs. 10,00,000 (subject to TDS, as applicable). This kind of multiplier effect makes fixed deposits with a cumulative rate of interest an ideal financial instrument to grow wealth and let money make money.
Fixed deposit non-cumulative rate of interest
By comparison, fixed deposits with a non-cumulative rate of interest do not accumulate interest over time. Instead, interest earned on a principal amount is periodically paid out to the investors as per the pay-out frequency selected by them.
For instance, let’s assume a person invests Rs. 10,00,000 for a tenure of 2 years at 7% fixed deposit ROI. Under the non-cumulative option, the investor chooses a monthly payout of interest. At 7% ROI, the investor would earn Rs. 70,000 every year on the principal investment, making the monthly interest payout Rs. 5,833 (Rs. 70,000/12).
At the end of the 2-year tenure, they will still get the principal investment of Rs. 10 lakhs back, having earned Rs. 1,40,000 of interest in monthly installments; this makes the non-cumulative fixed deposit option a great investment choice for retired individuals or people who want a periodic income from a lump sum amount, without spending it.
Difference between cumulative ROI and non-cumulative ROI
Now, in the above two examples, the ROI was the same but the net interest earned by the investor with cumulative ROI option (Rs. 1,44,900) was more than the investor with the non-cumulative ROI option (Rs. 1,40,000). This is exactly the point that confuses investors and makes them wonder if the interest rates are the same for both fixed deposit variants.
To understand how the same ROI can yield different total interest paid for both fixed deposit variants, let’s look at the table below.
| Principal (INR) | 1,00,000 | |||
| ROI (%) | 8 | |||
| Tenure (Years) | 5 | |||
| Cumulative | Non-cumulative | |||
| Year | Interest | Amount | Interest | Amount |
| 1 | 8,000 | 1,00,000 | 8,000 | 1,00,000 |
| 2 | 8,640 | 1,08,000 | 8,000 | 1,00,000 |
| 3 | 9,331.2 | 1,16,640 | 8,000 | 1,00,000 |
| 4 | 10,077.696 | 1,25,971.2 | 8,000 | 1,00,000 |
| 5 | 10,883.91168 | 1,36,048.9 | 8,000 | 1,00,000 |
| Maturity amount (INR) | 1,46,932.8 | 1,00,000 | ||
| Total interest paid (INR) | 46,932.81 | 40,000 | ||
When compared side by side, it becomes clear how the interest accumulation with cumulative ROI increases the total interest amount paid to an investor. For the principal amount of Rs. 1,00,000 (1 lakh rupees) invested at 8% ROI over 5 years, the non-cumulative ROI option yields a total interest of Rs. 40,000. Since this interest is paid out annually in equal installments of Rs. 8,000, every year the principal amount returns to Rs. 1,00,000.
In the cumulative ROI option, however, the interest amount earned every year keeps getting added to the principal amount, thereby increasing the base for interest calculation in the subsequent year. In the first year, the cumulative fixed deposit also generates an interest of Rs. 8,000, the same as the non-cumulative option. However, in the second year, this Rs. 8,000 gets added to the principal amount and the interest is calculated at 8% of 1,08,000, amounting to Rs. 8,640.
Over the remaining cumulative ROI fixed deposit tenure, as the interest keeps getting accumulated with the original principal amount, the final interest payout becomes Rs. 46,932.81. When compared to the total interest amount of Rs. 40,000, the internal ROI of the cumulative option seems to have been more, but the additional interest is merely a result of compounding.
In conclusion, cumulative ROI lets investors achieve their financial goals by accumulating the interest and reaping maturity benefits, whereas non-cumulative ROI allows investors to earn a steady interest income from their principal. While the fixed deposit ROI for both options is the same, the total interest earned by an investor varies due to the compounding effect. What investors need is a clear understanding of their own investment needs and a platform to choose the right fixed deposit option for themselves.
Shriram FD is accredited with [ICRA]AA+ (Stable)” by ICRA and "IND AA+/Stable" by India Ratings and Research and offer multiple tenure options and easy choice between online and offline investment. Shriram Finance fixed deposit scheme rate of interest is most rewarding and transparently built for investors of all classes. Moreover, if you still cannot compute your actual returns with cumulative ROI and non-cumulative ROI, then you can use the Shriram finance fixed deposit calculator and invest your money with zero confusion.
