Earn interest up to 7.95% p.a. by investing in a Bajaj Finance Fixed Deposit | Rated CRISIL AAA/ STABLE and [ICRA]AAA(stable)

Cumulative and non-cumulative FDs are among the safest investment options available for conservative investors who are looking for guaranteed returns today. They are also suitable for aggressive investors who wish to reduce the overall risk in their investment portfolio. So, no matter which category of investors you belong to, both cumulative and non-cumulative FDs may have some benefit for you.

 

If you are planning to invest in a fixed deposit, though, you need to be aware of what cumulative and non-cumulative FDs are. They each have their own benefits, but to make an informed choice between the two, you should know how they work. Let’s take a closer look at each type of fixed deposit and compare cumulative vs non-cumulative FDs.

What is a Cumulative FD?

A cumulative FD is a type of fixed deposit where the interest earned on the investment is accumulated or reinvested back into the deposit. This increases the amount on which interest is calculated for the next period, since the principal as well as the interest earned so far count. 

 

In other words, you earn interest on your interest through the power of compounding. This happens throughout the investment tenor. At the end of this tenor, the total interest accumulated is paid out at maturity. 

 

Let us take a look at an example to understand how cumulative deposits work. Say you invest ₹1 Lakh in a cumulative FD with a bank for 5 years at an interest rate of 6%. In that case, here is how the cumulative interest on your fixed deposit will be calculated year after year. 

Year

Amount on Which Interest is Calculated

Interest for the Year at 6% p.a.

Closing Balance at the End of the Year

1

₹1,00,000

₹6,000

₹1,06,000

2

₹1,06,000

₹6,360

₹1,12,360

3

₹1,12,360

₹6,742

₹1,19,102

4

₹1,19,102

₹7,146

₹1,26,248

5

₹1,26,248

₹7,575

₹1,33,823

Who Should Invest in a Cumulative FD? 

Cumulative fixed deposits do not pay out the interest earned on a regular basis. Rather, they accumulate the interest over the investment period. Due to this key characteristic, cumulative FDs are best suited for you if you meet any of the following criteria. 

 

  • If you have a regular source of income to rely on already

  • If you do not need any additional or secondary source of income at the moment

  • If your primary goal is capital appreciation in a safe manner

  • If you want to earn a higher interest on your deposit

What is a Non-Cumulative Fixed Deposit?

A non-cumulative deposit is also a kind of fixed deposit. However, as the name indicates, the interest on such an FD is not accumulated over the investment tenor. Rather, it is paid out to you at regular intervals. This is the key difference between cumulative and non-cumulative FDs. 

 

In this kind of fixed deposit, the payouts can be made on a monthly, quarterly, half-yearly or annual basis. You do not earn any interest on interest, since the earnings are paid out frequently. Therefore, the power of compounding does not come into effect here. But you do get the advantage of regular income.

 

Let’s check out an example to understand non-cumulative deposits better. Say you deposit₹1 Lakh in a non-cumulative fixed deposit in a bank. Based on your financial requirements, you can choose the interest payout frequency. Check out the amounts you can earn when you choose different kinds of payout frequencies in the table below.

Payout Frequency 

Rate of Interest p.a.

Rate of Interest for the Interest Payout Period (A)

Interest Earned per Payout
(A x ₹1,00,000)

Monthly

6.00%

0.50%


(i.e. 6% divided by 12 months)

₹500

Quarterly

6.00%

1.50%


(i.e. 6% divided by 4 quarters)

₹1,500

Half-yearly

6.00%

3.00%


(i.e. 6% divided by 2 half-years)

₹3,000

Annually

6.00%

6.00%


(i.e. 6% divided by 1 year)

₹6,000

Who Should Invest in a Non-Cumulative Fixed Deposit?

The defining characteristic of non-cumulative FDs is that they pay out the interest earned at regular intervals. Keeping this feature in mind, you may benefit from a non-cumulative fixed deposit if you meet any of the following conditions.

 

  • If you need to replace your primary source of income 

  • If you need some additional income 

  • If you are a retired person

  • If you prioritise regular earnings over capital appreciation 

Cumulative vs Non-Cumulative Fixed Deposit

We’ve discussed what cumulative FDs and non-cumulative FDs are. Now, let’s take a closer look at the key differences between these two types of fixed deposits. Here’s a table with a cumulative FD vs non-cumulative FD comparison.

Particulars

Cumulative FD

Non-Cumulative FD

Frequency of interest payout

Only at maturity 

As per your choice (can be monthly, quarterly, half-yearly or annually)

Accumulation of interest

Interest accrues throughout the tenor

Interest is not accumulated and is paid at regular intervals

Periodic income

Not generated 

Generated throughout the tenor

Total interest earned

On account of compounding, the interest earned each year is added to principal and as a result, the total interest earned is higher 

Since the the interest is paid out and not accumulated, there is no compounding, leading to comparatively lower earnings 

Suitable for

Depositors looking to grow their savings and create a higher corpus for investment goals

Depositors looking to fund regular expenses without reducing the principal

How to Maximise Your Fixed Deposit Returns?

Making the right choice between cumulative and non-cumulative FDs can help you maximise your FD returns. Ideally, by opting for a cumulative FD, you can earn higher interest overall. 

 

This is because in a cumulative fixed deposit, the interest you earn is reinvested in the FD account along with the original deposit amount on a regular basis. This means that the interest earned in the first cycle is added to your principal amount, thereby increasing the amount on which interest is calculated.

 

In the next cycle, you will earn interest on this increased principal, which contains the original deposit amount as well as the interest income earned so far. This is known as compounding of interest, and it is done till the end of the FD tenor. In this way, you can maximise your returns from a fixed deposit by opting for a cumulative FD instead of a non-cumulative one.

Which is better: Cumulative FD or Non-Cumulative FD?

The choice between cumulative FDs and non-cumulative FDs is quite easy if you know what your financial goals are. If you wish to supplement your current income or replace it with a regular source of earnings (perhaps like a pension), a non-cumulative FD is a better choice. 

 

On the other hand, if you are not looking for any extra income but instead want to grow your capital in a safe manner, cumulative FD option is more suitable.

Conclusion

This sums up the differences between cumulative and non-cumulative FDs. Now that you know how they each work and how they can benefit you, you can make a more informed decision about which kind of fixed deposit to choose for your investment portfolio. 

FAQs on Cumulative and Non-Cumulative FDs

  • ✔️What is the difference between cumulative and non-cumulative FD?

    The key difference between cumulative and non-cumulative FDs lies in how and when the interest is paid out. Interest is compounded in a cumulative or reinvestment fixed deposit and only paid out at maturity. In a non-cumulative FD plan, on the other hand, interest is paid at predetermined intervals.

  • ✔️What is the meaning of a cumulative FD?

    A cumulative FD is a kind of deposit where the interest is accumulated over the tenor of the deposit and paid out at maturity. This is the primary difference between a cumulative and non-cumulative FD. In the latter, the interest is paid out at regular interest as per the frequency chosen by you. The payouts can be monthly, quarterly, semi-annual or annual. 

  • ✔️What is the meaning of a cumulative deposit?

    The term ‘cumulative’ indicates an accumulation. A cumulative FD is a kind of fixed deposit in which the interest earned is accrued over the entire investment period. In other words, the interest gained over the course of the investment tenor is reinvested or added to the previous principal, thus raising the sum on which interest is calculated for the next period. This is known as compounding. 

  • ✔️Is a cumulative FD better?

    Interest earned on a cumulative FD is greater than interest earned on a non-cumulative deposit. The main difference is that in a cumulative deposit, the interest is paid at maturity, while in a non-cumulative deposit, the interest is paid at regular intervals. The answer to which is better between a cumulative and non-cumulative FD depends on your financial goals and requirements.