Understanding Cumulative And Non-cumulative FDs: A Complete Guide

In India, very few other options give you the flexibility and safety of investment like a fixed deposit. Within them, comparing the features of a cumulative vs non-cumulative FD can help you make a choice that either increases your returns or your liquidity. 

If you are thinking of a long-term investment, consider a cumulative FD. If you prefer periodic returns, start a non-cumulative FD. To understand these two highly popular FD options, read on.

What is a Cumulative FD?

If you are planning for the long term or want to deposit a considerable amount for safekeeping while earning interest, then you should consider these FDs. With them, you can benefit from compounding interest over the tenure and get the interest amount along with your capital at maturity. 

 In this way, your money continues to grow without any need to monitor it. Now that you know the meaning of cumulative FD, here are its benefits:

• It is a great option for long-term goals
• It is a convenient way to build your wealth
• It offers higher returns

What is a Non-Cumulative FD?

If you are looking for periodic earnings, then a non-cumulative FD is your best choice. With it, your invested amount earns interest on a monthly, quarterly or yearly basis. You can also choose to receive your payout bi-annually. This means you have greater liquidity for recurring expenses as you can access your interest gains without waiting for the FD to mature. To make up for this benefit, the interest rate is lower. 

Here are its benefits:

• It offers you a steady income
• Ideal for managing post-retirement expenses 

Also Read : Callable Vs Non Callable FD

Cumulative and Non-cumulative FD Differences

Here’s a brief overview of what each of these options offers in terms of payout and other factors so you can make the right call. 

Differences	Cumulative FD	Non-cumulative FD
Interest Rate	Relatively higher than non-cumulative FDs	Relatively lower than cumulative FDs
Payout Timeline	Paid on maturity	Paid periodically
Best Suited For	Long-term financial goals	Periodic earning

Factors to Consider Before Booking a Deposit 

Cumulative and non-cumulative FDs have different features and benefits, and only you can pick which one is ideal for you. Here’s a list of the factors that can help you decide between the two:

• Understand Your Financial Objectives 

If you are looking for long-term savings, then a cumulative FD is a great tool; however, if you want regular income, you should consider non-cumulative FDs.

• Consider Your Desire For Liquidity

If you can manage your finances without needing to withdraw the FD investment for however long you wish to invest, go for the cumulative option as it offers higher returns. 

If you need to pay bills or recurring expenses with the interest earnings, choose a non-cumulative FD.

• Compare Interest Rates

While picking which FD would be better, consider the prevailing interest rates of the financial institution for both options. In this way, you make an informed decision by comparing the gains.  

• Consider the Investment Tenure

While investing you must think about the tenure you can invest your money for. Cumulative FDs can give you higher returns as the interest is compounded for the entire tenure. Non-cumulative options will offer the same return despite the tenure.

Cumulative and non-cumulative FDs are a great way to invest any extra funds or savings you have. This is because they come with lower risk and offer better returns compared to a savings account. 

FAQs on Cumulative and Non-cumulative FDs

How does interest payout differ in cumulative vs non-cumulative FDs?

In cumulative FDs, the interest you earn is added to your capital. This way, it continues to grow through compounding interest. In a non-cumulative fixed deposit, your interest will be credited to your account, and you can access it before maturity at intervals of your choice. 

Which option is better for monthly income: cumulative or non-cumulative FD?

For monthly income, the non-cumulative deposit is a better option. It allows you to access the interest payout at regular intervals, be it monthly, quarterly or annually. 

Can I switch from a non-cumulative FD to a cumulative FD during the tenure?

This depends on the financial institution where you have made the deposit. If it permits,  you can convert your non-cumulative fixed deposit to a cumulative option during the tenure. If not, then you can reinvest the amount in an FD of your choice after the completion of the tenure.