About Cumulative FD
Fixed Deposits are considered a secure investment option that offers stable decent returns, no market risk, special interest rates for senior citizens, various interest payment options, and income tax benefits. An important factor to observe before investing in FDs is whether the FD is cumulative or noncumulative. In this article, we are going to discuss cumulative FDs.
What Are Cumulative FDs ?
In cumulative FDs, the word cumulative implies accumulation. This indicates that the interest is accumulated or collected till the end of the tenure that is opted by the investor. For instance, if an investor invests Rs.10,00,000 today for a time horizon of 3 years i.e. 36 months at a return rate of 7%, they will earn a cumulative interest of Rs. 2,31,439 at the time of maturity of the FD account.
The interest earned here in one cycle or a year is reinvested into the previous principal amount invested, hence increasing it. This in turn increases the interest using the compounding principle. When the FD matures, the amount receivable by the investor is a total of their principal amount along with the accumulated interest based on the applicable rates. They can have a look at our previous articles on FD interest rates to gain a better idea of the same.
Who Should Opt For Cumulative FD ?
For investors who are interested in enhancing their returns and looking to fulfill long-term financial goals, the cumulative fixed deposit is the ideal option to go forward with. The interest is usually accrued quarterly or yearly is reinvested regularly. Thus increasing the principal.
This increase principal becomes the new amount on which the interest will be calculated in the next cycle. Therefore, investors earn a higher interest which continues till the end of the FD tenure. This increases the returns to the maximum because of compounding.
Difference Between Cumulative and Non-Cumulative FDs
| BASIS | CUMULATIVE FD | NON CUMULATIVE FD |
| Interest Accumulation | Done throughout the FD tenure | Not accumulated as it is paid out at intervals |
| Interest payout frequency | At the time of maturity | Yearly, Half-yearly, quarterly, or Monthly - as per inventor’s will. |
| Total interest earned | Total interest earned is higher, as interest generated throughout the tenure is added to principal for further calculation and compounding | Total interest earned is lower and the payout amount decreases when the frequency is high |
| Periodic Income | No periodic income is generated | Periodic income generate throughout the FD tenure |
| Ideal for | Investors looking to build their wealth and want their savings to grow for their financial goals. | Investors looking to get periodic income to fund regular expenses without denting the principal. |
How to opt between the two ?
Salaried individuals or small businessmen who do not mandatorily need any added income to meet their monthly commitments can easily go forward with cumulative FD. By saving a larger amount, the corpus built using a cumulative scheme can help to meet the long-term investment and financial goals.
For retired pensioners or individuals who do not have a regular source of income, noncumulative FD can prove to be ideal as they provide periodic payments on regular intervals, allowing such individuals to better plan their monthly expenses.
Irrespective of which section you belong to, an FD, can help you build a better wealth and corpus for the future. In fact, they are the most opted form of investment in India to help investors meet their long-term goals.
Frequently Asked Questions about Cumulative FD
Q. Who should opt for cumulative FD ?
A. Investors looking to build their wealth and want their savings to grow for their financial goals.
Q. What is cumulative FD ?
A. n cumulative FDs, the word cumulative implies accumulation. This indicates that the interest is accumulated or collected till the end of the tenure that is opted by the investor.
Q. Does Cumulative FD offer periodic income ?
A. No, Cumulative FD does not offer a periodic return.
Q. What is the interest payout frequency of cumulative FD ?
A. There is no payout frequency as the payment of interest is made at maturity.
Also Read ;