Cumulative Vs Non-Cumulative Fixed Deposits: An Overview
Fixed deposits are among the most popular financial products in India. They offer a safe and hassle-free investment option that is available across all banks and financial institutions. In fact, many banks offer higher interest rates for fixed deposits than for other savings products such as term deposits.
In this article, we will discuss the difference between cumulative and non-cumulative fixed deposits, along with some other relevant factors to consider before investing in these types of deposits.
Basics Of Cumulative And Non-Cumulative Fixed Deposits
A fixed deposit is a type of deposit where the customer makes a deposit in advance with a bank or any other financial institution for a predetermined period of time and earns interest on it. The interest rate offered on fixed deposits depends on the type of account, tenure and applicable interest rate at the time. The account holder can choose to make additional deposits during this period if he wishes to do so by paying an additional stipulated minimum amount as penalty or premium (known as penal rate). In such cases, the entire amount gets added to the principal amount and earns interest at the prevailing rate at that point in time.
What is a Cumulative Fixed Deposit?
A Cumulative Fixed Deposit is a kind of fixed deposit that allows you to earn interest on your deposits, along with the interest that was already earned.
In other words, if you have a cumulative deposit of Rs. 100,000 and the rate of interest is 5%, the bank will pay you 5% on your deposit along with the interest that was already accumulated in your account.
The amount paid to you will be determined by the number of days that have passed since your deposit was made. For example, if it has been 30 days since you made your deposit, then the bank will pay you an additional 5% on top of the initial interest rate i.e., 10% interest in total.
What is a Non-Cumulative Fixed Deposit?
A non-cumulative fixed deposit is a time-deposit account, which provides fixed interest rate on the entire deposit amount for the tenure selected by you. Non-cumulative FDs do not accumulate interest on the principal amount invested, which means that interest earned in a previous tenure is not added to the principal amount and hence, will not earn any further interest during next tenure.
Unlike cumulative FDs that add interest earned in one tenure to the principal amount and offer higher interest rates on them, non-cumulative FDs offer fixed interest rate on the entire deposit amount for the selected tenure period.
Difference between Cumulative and Non-Cumulative Fixed Deposits
The key differences between cumulative and non-cumulative fixed deposits are explained below:
1. Cumulative FDs have a higher interest rate as compared to non-cumulative ones, which makes them more popular among investors.
2. In case of a non-cumulative FD, the interest earned is paid annually at the end of the tenure or upon maturity. However, in case of a cumulative FD, you will be paid the interest on your deposit every year.
3. On maturity of cumulative fixed deposits, the entire interest earned is paid along with your principal amount in case of non-cumulative FDs, only the accrued interest will be paid at maturity while rest of your money goes back to bank’s balance sheet
Which type of Fixed Deposit is Suitable for You?
Fixed deposits are the most popular investment option for retail investors. They are safe, secure, and offer attractive returns.
In this article, I will discuss different types of fixed deposits, their interest rates and what should be your criteria while choosing a fixed deposit.
Fixed deposits are available in two variants:
Single or Senior FDs: These are by far the most common type of FDs and you will find them at every bank branch in India. These FDs have a tenure of 7 days to 5 years. The longer the tenure, the higher is the interest rate offered by banks.
Jumbo FDs: This is another popular variety of FDs which can be opened by senior citizens above 60 years of age. These FDs have a tenure of 1 year to 5 years and offer higher interest rates than other types of FDs as per RBI guidelines. >>>Read More<<<