Cumulative vs Non-cumulative FD

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Fixed deposits (FDs) are a popular investment choice among investors due to the secure and guaranteed returns offered. FDs come in two categories, i.e. cumulative and non-cumulative, distinguished by their interest payout structure. Each type has its own set of features and benefits, catering to different financial goals and preferences.

Cumulative FDs accumulate interest over the deposit period and pay out the entire principal amount along with the accumulated interest at maturity. Non-cumulative FDs, on the other hand, pay out the interest earned at regular intervals, depending on the investor's preference. However, investors must carefully consider the factors that differentiate them before investing.

Difference Between Cumulative and Non-Cumulative FD

The following table presents a comparative analysis of cumulative vs non-cumulative FDs:

Particulars	Cumulative FD	Non-Cumulative FD
Interest payout frequency	At maturity	On monthly, quarterly, half-yearly, or annual basis
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	Compounding interest is added to the principal amount, leading to higher interest earnings	Due to interest payouts instead of accumulation, non-compounding results in lower earnings
Suitable for	Depositors looking to grow their savings and create a higher corpus for investment goals	Individuals depositing a substantial sum in an FD, to benefit from frequent interest payout

How is Cumulative FD Interest Calculated

For example, if you invest ₹1 Lakh in a cumulative FD with a bank for five years at an interest rate of 6%. In that case, here is how the cumulative interest on your fixed deposit will be calculated each year.

Year	Amount on Which Interest is Calculated	Interest Earned	Yearly Closing Balance
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

How is Non-cumulative FD Interest Calculated

Say, you deposit ₹1 Lakh in a non-cumulative fixed deposit offered by a bank. Based on your financial requirements, you can choose an interest payout frequency. Explore the potential earnings based on various payout frequencies in the table provided below.

Payout Frequency	Interest Rate (p.a.)	Interest Rate 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

Choosing between cumulative FDs and non-cumulative FDs becomes easier once your financial goals are clear. If your objective is to bolster your current income or establish a consistent source of earnings, a non-cumulative FD emerges as the more fitting choice.

Conversely, for those seeking a secure avenue to foster capital growth, the cumulative FD option proves more suitable. However, before making a decision, it's vital to consider the nuances of each type, weighing factors such as risk tolerance, investment horizon, and liquidity needs.

How does the interest accrual differ in cumulative and non-cumulative FDs?

Cumulative FDs accumulate interest throughout the investment period, leading to compounding effects. Non-cumulative FDs disburse interest regularly, providing a steady income stream.

What are the payout frequency options for non-cumulative FDs?

Non-cumulative FDs offer payout frequencies such as monthly, quarterly, half-yearly, or annual, allowing investors to choose based on their income needs.

Which type of FD is suitable for those seeking regular income?

Non-cumulative FDs are ideal for individuals looking to supplement their current income, providing a reliable source of earnings at specified intervals. However, the viability of this option, as an income source, depends on the amount deposited and the financial support required by the individual.

If I want to grow my capital securely, which FD option should I choose?

For individuals focused on steady and uninterrupted capital growth, the cumulative FD option is more suitable due to its compounding nature.

Do non-cumulative FDs benefit from the power of compounding?

No. Non-cumulative FDs do not leverage the power of compounding, as interest is paid out regularly, and there is no reinvestment to earn additional interest.