Cumulative vs Non Cumulative Fixed Deposit

The word cumulative means to ‘increase by successive additions.’ In a cumulative fixed deposit, the interest earned on an FD is added back to the principal and reinvested. This means that you will not receive regular interest payouts in Cumulative Fixed Deposits.

Consequently, the next interest payment is calculated on the entire amount, including the principal and the reinvested interest. The reinvestment happens throughout the tenure, and a lump sum amount can be redeemed at maturity. The lump sum, hence, comprises both — the principal and the accumulated interest.

Non-cumulative FDs regularly pay interest to the investors, either monthly, quarterly, half-yearly or annually. As a result, the returns on non-cumulative fixed deposits are not compounded and have a slightly lower effective interest rate.

• Meaning: A cumulative FD means a fixed deposit where the interest is accumulated and reinvested, and the investor receives a lump sum at maturity. A non-cumulative FD pays interest regularly, and the principal amount is redeemed at maturity.

Example of Cumulative FD

As you can see, if you invest in a cumulative FD, the interest at the end of year 1, Rs. 6500, is reinvested, and the principal for year 2 becomes Rs. 100000 + 6500 = Rs. 106500. At the end of 5 years, you get an amount of Rs. 137009. Of this, Rs. 37009 is your accumulated interest.

Example of Non-cumulative FD

Alternatively, for a non-cumulative FD of Rs. 1 lakh with a tenure of 5 years and an interest rate of 6.5% (annual interest payout), the table of returns will be:

• Interest Payout: As you can see, if you invest in a cumulative FD, the interest at the end of year 1, Rs. 6500, is reinvested, and the principal for year 2 becomes Rs. 100000 + 6500 = Rs. 106500. At the end of 5 years, you get an amount of Rs. 137009. Of this, Rs. 37009 is your accumulated interest. Meanwhile, for non-cumulative FD, the interest of Rs.6500 is paid annually to the investor. The total interest amount is Rs. 32500, which happens to be lower than that of a cumulative fixed deposit.
• Income Flow: As seen above, a cumulative FD holder does not receive any payment during the tenure of the FD, after which he receives a lump sum. However, a non-cumulative FD holder enjoys a regular income flow throughout the deposit term until maturity. Depending on your unique investment needs, you can also choose the interest payout frequency.
• Reinvestment: In the case of a cumulative FD, the interest income is reinvested into the scheme. As a result, the investor earns interest even on his accumulated interest. In non-cumulative FDs, however, the interest is paid out, and the investor only earns interest on the principal they had initially deposited. Consequently, the total returns on a non-cumulative FD are slightly lower than a cumulative FD.
• Suitability: Due to its regular income stream, a non-cumulative FD is ideal for someone without a stable income, such as artists, salespeople, freelancers, etc. A cumulative FD, on the other hand, is only suitable for someone who doesn’t depend on the FD for a regular income stream, such as salaried employees, people with stable business profits, etc.

People not dependent on the return on investments for a regular income stream can invest in a cumulative FD. So, salaried employees and people earning a stable income from their businesses may find cumulative FDs beneficial. Alternatively, you can consider investing in a cumulative FD if you want a lump sum to meet a future goal.

People who do not have a regular income stream, such as retired persons, homemakers who are not working etc., could opt for a non-cumulative fixed deposit to to create a regular income stream and stabilise their finances.

Different people have different goals for financial investment. If your goal is to add to your existing regular income, then non-cumulative FD might serve your purpose. But, if you want to multiply your savings, consider the cumulative scheme. You can choose to invest in either of the FDs after conducting due diligence per your flow of income and financial goals.