A fixed deposit is widely considered a relatively stable investment option in India because it offers predictable returns for a fixed tenure. It is categorised into a cumulative and a non-cumulative fixed deposit depending on the interest payout frequency. In a cumulative fixed deposit, the investor gets interest as a lump sum at the end of maturity. On the other hand, in a non-cumulative fixed deposit, interest is regularly paid to the investor. This article shares with you the differences between cumulative vs non-cumulative fixed deposits in detail, helping you decide which one is right for you.
What is a Cumulative Fixed Deposit?
A cumulative fixed deposit accumulates the interest amount until maturity and the interest is compounded every month. The interest that is earned is added to the principal amount and is paid on maturity.
The tenure of a cumulative fixed deposit generally ranges between 12 and 60 months. This type of fixed deposit is ideal for investors who do not depend on a regular income.
Let us understand the concept better with an example.
Who should invest in a Cumulative Fixed Deposit?
A cumulative fixed deposit is well suited for those who do not rely on income through interest. Generally, a person looking for a long-term investment option can consider opting for a cumulative fixed deposit scheme.
What is a Non-Cumulative Fixed Deposit?
A non-cumulative fixed deposit pays the accumulated interest regularly to the investor. Based on the choice of the investor, interest payout can be monthly, quarterly, half-yearly or yearly. It is essential to know that the interest rates vary for each payout option.
The tenure usually ranges from 12 to 60 months. A non-cumulative FD is preferred by investors who require a regular income, for example, pensioners.
Who should invest in a Non-Cumulative Fixed Deposit?
A non-cumulative fixed deposit will be a good choice for those who want a regular income, especially retired people and senior citizens. In other words, if you want a consistent income from your savings, this is the right choice.
Cumulative vs Non-Cumulative Fixed Deposit: What is the difference?
Interest Payout in a Fixed Deposit
The point of differentiation between cumulative and non-cumulative fixed deposits lies in the interest payout frequency. In a cumulative fixed deposit, the interest is payable at maturity, while in a non-cumulative fixed deposit, the interest is payable as per the investor's choice.
In a cumulative fixed deposit, the interest earned is reinvested, and is paid only on maturity. The interest compounds every month. For instance, Ms Rai deposits ₹1,00,000 at a rate of interest of 7% in a cumulative scheme for a tenure of 2 years. Ms Rai will not receive any interest before the completion of 2 years because the interest is accumulated and given out on maturity.
On the other hand, in a non-cumulative fixed deposit, the interest payout depends on the investor. The investor can choose an interest payout frequency according to their needs. The depositor has the choice of selecting between monthly, quarterly, half-yearly or yearly interest payouts.
Income Flow in a Fixed Deposit
The depositor does not receive interest during the fixed deposit tenure in a cumulative fixed deposit. The interest is accumulated along with the principal amount and is paid as a lump sum at the end of the tenure. On the other hand, in non-cumulative fixed deposits, the depositor will receive money at regular intervals and hence, it is a good source of income.
Reinvestment
The interest earned is reinvested in a cumulative deposit where the interest compounds every month. Hence, this can fetch an investor a higher return than a non-cumulative fixed deposit. On the other hand, in a non-cumulative fixed deposit, there is no interest reinvestment. The interest is paid at regular intervals. Also, the total interest rate is lower than the cumulative fixed deposit option.
Suitability
In a cumulative Fixed Deposit, the interest earned is compounded monthly and paid out together with the principal at the end of the tenure. Since the interest builds on an increasingly larger base over time, the total interest earned at maturity tends to be higher compared to a non-cumulative FD of the same tenure and amount.
This option is well-suited for individuals who do not require periodic interest payouts and prefer to receive a consolidated amount at the end of their chosen tenure. It is particularly suitable for salaried individuals or those looking to grow their savings over the long term without drawing on their interest earnings during the tenure.
However, individuals who look to earn a regular income from their investments can opt for a non-cumulative fixed deposit. Therefore, the non-cumulative fixed deposit scheme is suitable for retired people, freelancers, homemakers, etc., who might depend on regular interest payments from their savings.
Cumulative fixed deposit Vs Non-Cumulative fixed deposit, which one is better?
The choice between these two types of interest payouts can be an investor's decision depending on their requirement and needs. If your investment purpose is to get regular income, then it is best to choose a non-cumulative fixed deposit. However, suppose your investment purpose is not to look for any add-on but to grow your investment at a good exponential rate, you may opt for a cumulative fixed deposit.