Cumulative vs Non-Cumulative FD

The term "cumulative" refers to a collection of things. A Cumulative Fixed Deposit is a deposit where interest is accrued or collected until the maturity of the FD .

In a Cumulative Fixed Deposit Scheme, the interest amount is compounded over the term of the deposit and paid at maturity. Longer deposits generally earn higher FD rates. For example if an FD earns interest every quarter, then the interest which is earned at the end of one quarter is re-invested at the beginning of the subsequent quarter along with the original principal amount and this sum becomes the principal for that quarter. Known as ‘compounding’, this is how cumulative fixed deposits yield higher returns upon maturity.

The interest earned on a non-cumulative fixed deposit is paid to the depositor regularly. At IDFC FIRST Bank, interest on FD can be paid at intervals ranging from monthly and quarterly in addition to interest paid at maturity ... Because the bank does not withhold the interest, the FD provides a consistent return to investors. The power of compounding is not  realised, so it pays less interest than cumulative FD. Moreover, in case of monthly interest payout, interest is paid at a slightly discounted rate, since interest is paid to the customer on monthly basis which is even before the interest is calculated at the end of the quarter. – This can be re-worded appropriately. 

There are two types of fixed deposits: cumulative and non-cumulative. In a cumulative fixed deposit scheme,  interest is paid out  upon maturity of the FD and not at monthly or quarterly intervals. The interest is compounded and paid after the term. For example, if you invest at 10% interest in a financial firm's cumulative plan, you will not receive interest regularly, but only after the scheme's term.

The firm will pay the principal amount as well as any accrued interest after the term is over.

Interest is compounded quarterly in a cumulative or reinvestment fixed deposit. Later, the compounded income is re-invested with the principal. Cumulative fixed deposits have a maturity duration ranging from six months 1day to ten years.

As a result, cumulative fixed deposit schemes are sometimes called money multiplier schemes. In a non-cumulative FD, meanwhile the  interest is paid at predetermined intervals at the time of booking the FD, the interval payout thus selected cannot change mid-way.

A cumulative fixed deposit accrues the interest earned over the entire FD tenure and pays it with the invested amount at the end of maturity. This accrual helps to compound your investments and deliver high returns at maturity. For this reason, it is also known as the money multiplier scheme.

A cumulative FD is suitable for individuals looking to invest for longer tenure and do not need regular pay-outs. Those who don’t depend on interest payout for their monthly expenses can invest in a cumulative fixed deposit and get enhanced returns at maturity. So these deposit schemes are suitable for young professionals, salaried individuals, self-employed, and business owners who have other sources of income to meet their daily expenses. Moreover, goal-based savers may also invest in a cumulative FD.

However, anyone can invest in a high-yield fixed deposit account, such as the IDFC FIRST Bank fixed deposit and earn decent interest on their idle funds. 

Unlike a cumulative FD, a non-cumulative FD pays the earned interest at fixed intervals. At IDFC FIRST Bank, you can opt for monthly or quarterlyinterest payments based on your requirements. For regular payments, these deposit schemes are suitable for individuals who depend on the interest earned through an FD for their daily expenses.

So, non-cumulative FDs are suitable for retirees, housewives, freelancers, and anyone who does not intend to invest and earn regular payouts. Most people after retirement choose a non-cumulative FD since it supports them with an additional income for their daily monetary requirements.

However, these accounts are not limited to retirees and housewives. Anyone with a need for an additional regular payout can invest in a non-cumulative FD and meet their financial requirements. 

Choosing the right type of deposit scheme can help you maximise your returns. You can maximise your profits with a cumulative fixed deposit of a longer tenure. The interest earned is re-invested regularly in this account. As a result, the principle is increased by the interest earned in the first cycle (usually quarterly). In the second cycle, interest is computed on the increased principal, which results in higher interest. The process continues until the cumulative FD's term ends. As a result, interest on the cumulative FD at the end is higher than on a standard non-cumulative fixed deposit, and profits are maximised.

Everyone who wishes to open a fixed deposit account has this common question - which is a better option between a cumulative and a non-cumulative deposit? However, there is no direct comparison between them. Both deposit accounts have similar functions and objectives. The only thing that differentiates them is the interest pay-out frequency, the general thumb rule is cumulative deposits generally earn slightly higher interest rates due to the compounding effect.

 . So, it is a matter of choice for the applicant to choose a suitable deposit option.

Individuals looking for long-term and goal-based deposits can invest in a cumulative FD and those for regular pay-outs can deposit money in a non-cumulative FD. Both investments are risk-free and offer decent returns. Depending on your financial requirements and objective, one may be more suitable for you than the other.

Therefore, a cumulative fixed deposit should be your choice if you want to maximise your profits. You can invest in a fixed deposit in any bank, including IDFC FIRST Bank. IDFC FIRST Bank offers appealing fixed deposit features, such as a  high interest rate and monthly and quarterly pay-out options. Senior Citizens earn an additional 0.5% p.a. over and above the regular interest rates.  These features ensure that you are getting the most out of your fixed deposit investment. Download the IDFC FIRST Bank mobile banking app and open your fixed deposit account today.