Cumulative FD: Interest Rates 2023-24, Meaning, Definition

Fixed deposits (FD) are highly popular investment instruments. The fixed and predictable returns, the flexibility in choosing the duration, and the feasible investment amount make FDs a much sought-after savings scheme. Moreover, banks, deposit-taking non-banking financial companies (NBFCs), and post offices offer a range of fixed deposit schemes to suit the varied needs of different investors. If you are a risk-averse investor, you could consider investing in fixed deposit schemes.

Depending on the payout of the interest amount, fixed deposits are categorised into cumulative and non-cumulative FDs. These schemes differ in interest payments even though the interest rates may be the same. Based on your financial goals, you can choose to invest in either or both of these schemes. Here is a complete low-down on what a cumulative FD means.

What is Cumulative FD?

A Cumulative FD is a scheme wherein the interest on your investment accumulates during the deposit tenure. The interest is compounded annually or quarterly, depending on your preferred scheme. It means that the earned interest is reinvested in the FD account—interest gets added to the principal amount—and the subsequent interest is then calculated on the aggregate amount. The accrued interest is paid along with the principal amount on maturity. Cumulative FDs are best suited for investors who do not need a regular income and want to create a substantial deposit over a longer term.

Suppose you open a cumulative fixed deposit account with a bank and deposit Rs. 1 lakh for six years at an interest rate of 6.5% per annum compounded annually. In this case, here’s how the interest would accumulate over the deposit period:

The calculation above shows how interest earned on the FD is added up each year to the previous principal amount. Every year, interest is calculated on both the principal and the accumulated interest. The total interest that you earn on the FD is Rs. 45,913. It will be credited to your account in a lump sum at the end of 6 years, along with the principal amount.

Also Read: FD Interest Rates Comparison

Who Should Invest in a Cumulative FD?

Here are the typical groups of people that would benefit the most from investing in a Cumulative FD:

Long-Term Investing: Cumulative FDs may appeal to those searching for long-term investment solutions to build wealth over time because they take advantage of compound interest.

Investors who avoid risk: Cumulative FDs, which give a fixed interest rate and are typically seen as safe, may be preferred by people who would rather avoid riskier investments like stocks or mutual funds.

Retirement Planners: A cumulative FD may be chosen by those who are saving for retirement and want to grow a portion of their funds without regular income requirements.
Savings with a Purpose:

Specified Goals: Cumulative FDs are a good option for people who want to increase their savings while working towards a specific financial goal (such as purchasing a home or paying for college).

Tax Advisors: Cumulative options are good for people who want to minimise their tax by investing in tax-saving FDs, especially if they don’t need regular interest income.
Young Traders:

Young Investors: A cumulative FD is a good place for new investors to start because it’s simple to comprehend and administer.

Irregular Income Needs: Cumulative FDs may be preferred by people who do not need recurring interest payments to maximise compounding.

Cumulative FD Interest Rates 2024

The interest rate on cumulative fixed deposits depends on the financial institution. Here are the interest rates on cumulative FDs offered by a few banks/NBFCs for deposits below Rs. 2 crores:

Also Read: Experience financial growth with unmatched Bajaj Finance FD Rates

Differences Between Cumulative FD and Non-cumulative FD

As mentioned earlier, fixed deposits are classified as cumulative or non-cumulative. Here’s how they differ:

Furthermore, many financial institutions have different interest rates for cumulative and non-cumulative fixed deposit schemes. It is best to check the interest rates before you invest.

Also Read: EPF vs PPF: Which one is a better investment option?

Final Thoughts

A Cumulative FD is also known as a money multiplier scheme, as the interest gets compounded until maturity. This type of FD is ideal for people who are not looking to earn regular interest or have a steady income from investment. If you want to save for a particular goal and earn reasonable returns on your investment, you can consider opting for a cumulative fixed deposit.

When opting for a fixed deposit scheme, remember that cumulative FD will create a lump sum corpus on maturity, while non-cumulative FD will create a regular and guaranteed stream of income throughout the deposit tenure. It ultimately boils down to your requirements and financial goals.

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