Fixed deposit (FD) is a great all-weather investment option. They are used by investors to balance and diversify their portfolios in the face of market volatility, by risk-averse senior citizens looking for attractive FD interest rates, and anyone who wishes to save their money in a safe and secure manner.
Banks, non-banking finance companies (NBFCs) and post offices offer FDs at varying discounts with the option to either receive a lump sum upon maturity or as regular pay out monthly, quarterly or annually. The interest in FDs is compounded, making them a popular investment tool.
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FDs: Cumulative and non cumulative meaning
Fixed deposits can be of two types – cumulative and non-cumulative. A non-cumulative FD offers periodic payouts to investors. These payouts are offered quarterly, monthly, bi-annually, or annually. The interest is also compounded based on the intervals at which the payout is set to be made.
In the case of a cumulative fixed deposit, the interest on your principal amount is reinvested and you get a compounded return. When your FD matures, you get the compounded interest in addition to the principal amount that you initially invested.
Benefits of cumulative and non-cumulative FDs
Cumulative FDs are a great way to multiply your money if you can afford to lock in your investment over a long period of time. This happens because the interest rate on a cumulative FD is higher than that received on a non-cumulative FD. Moreover, unlike non-cumulative FD, these long-term investments help save tax in the five-year tenure.
A non-cumulative FD, on the other hand, is suited for investors looking for a regular source of income such as retired persons. They can simply invest a large sum in an FD and gain a regular income.
Conclusion
A cumulative FD works to multiply your total investment through the magic of compound interest. Moreover, it is an effective tax saving investment tool, which makes it a better option than a non-cumulative fixed deposit for most investors.
