Which Is A Better Fixed Deposit Scheme: Cumulative Or Non-Cumulative FD?

In these volatile days of fluctuating stocks and shares, investors are keen to increase their income with minimal risk to their investment. You can get a substantial return if you invest in shares, but your investment will be fraught with risks. Fixed Deposit (FD) offer investors a safe & secure option of saving money and earning a regular income, which is tax-free up to a specific limit.

Like other investment vehicles, fixed deposit schemes also have different categories to suit the needs of specific investors. Now we will take you through two types of FD – cumulative and non-cumulative.

Cumulative Fixed Deposits

The primary feature of the cumulative fixed deposit scheme is that they offer the benefit of compounding. When you invest in cumulative FDs, the interest that you will earn during the first year is added to the principal of the second year. And on the amount after the addition, the interest is calculated.

Effectively, this mode reinvests your interest-earning in the FD. So, the accumulated interest will also increase every year, thus giving the highest fd interest rates.

However, you must keep one thing in mind. You will receive the interest only when the tenure of the investment is over. E.g., you invest Rs 1 lakh in a cumulative FD at 8% interest per annum for two years. At the end of the 2nd year, you will earn an interest of Rs 16,640. You will not be able to withdraw the interest every month, quarter, or year – until the investment has run its full course.

Non-Cumulative Fixed Deposits

In a non-cumulative fixed deposit scheme, you can avail of the interest at a mode of your choice – monthly, quarterly, half-yearly, or annual.

E.g., you invest Rs 1 lakh at 10% per annum interest under the non-cumulative scheme. So, you will receive Rs 10,000 as interest annually. You can choose to receive this money every month, quarter, every six months or at the end of the year.

Which of The Two Options Is Better?

Many prospective FD investors like to know about the one providing the highest fd interest rates.

But there is no direct answer to this question. Solely because it depends entirely on the investor as to where they want to invest thier money. The investor will select the mode depending upon his/her requirement of the fund.

If you need a regular inflow of funds, then you should opt for the non-cumulative mode. This option works well for retired individuals, as it ensures consistent cash inflow – much like the salary they earned when they were working.

However, if you have a goal of building up a cash corpus at the end of a particular period – for buying a car or for acquiring any other asset – then the cumulative option will work best for you. The cumulative mode has one advantage over non-cumulative, though – it offers higher interest.

To conclude, your choice of the mode of FD will depend on the end requirement that you have for the money. So, choose the option after careful consideration – and enjoy the safety & stability that an FD offers you.

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