Cumulative vs Non-cumulative FD

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.

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.

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. 

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

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.

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 

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.

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.

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.