Which is better: Cumulative or Non-Cumulative Fixed Deposits?

Fixed Deposits (FDs) are one of India's most popular and secure investment choices. They have been a traditional favorite due to assured returns, good liquidity, and higher safety compared to other investment options. Fixed Deposits are typically available in two forms - Cumulative and Non-Cumulative FDs.

Let us explore the differences between Cumulative and Non-Cumulative Fixed Deposits, how their interest payouts differ and their benefits and suitability.

Cumulative vs Non-Cumulative Fixed Deposits

Cumulative FDs

The term 'cumulative' means accumulation. In a Cumulative FD, the interest earned is compounded and added to the principal amount. The total amount, including the principal and accumulated interest, is paid out at the end of the tenure.

Let's illustrate this with a simple example: If you invest ₹1,00,000 in a Cumulative FD for 5 years at an interest rate of 7% p.a., you will earn ₹41,478 as interest. At the end of the FD tenure, you will receive ₹1,41,478 in total.

Non-cumulative FDs

In a Non-Cumulative FD, the interest earned is paid out at regular intervals based on your preference. You can choose to receive interest monthly or quarterly.

Using the previous example, if you opt for a quarterly payout, you will receive ₹1,750 as interest every quarter (7% of ₹1,00,000 divided by 4). The total interest earned during the five years will amount to ₹35,000 (₹7,000 * 5).

Which option is better for you?

Both cumulative and non-cumulative FDs are great savings options. The choice between the two depends on your liquidity preferences and investment goals. If you want to build a corpus for short- or long-term objectives, the cumulative FD is a good fit. However, if you need regular income for recurring expenses, the non-cumulative FD is more suitable.

Keep in mind that a Cumulative FD can yield higher interest returns because of compounding but the interest is paid out at the end of the tenure. On the other hand, Non-Cumulative FDs offer a regular income through periodic interest payouts.

You could make use of the Axis Bank FD Calculator to get an estimate of the returns you can earn on your FD. You will have to enter details like the principal amount, the interest rate, and the tenure of the deposit. Once this data is submitted, you will obtain the maturity amount and the interest earned over the tenure of the FD.

Also Read: [Reasons why senior citizens should invest in Fixed Deposits]

In a nutshell

Opting for a Cumulative or Non-Cumulative FD depends on your liquidity needs and investment objectives. While choosing between the two, it is advised to compare the interest rates of deposits and the terms offered by various banks.

Axis Bank's digital fixed deposit services make it effortless to open an account from the comfort of your home. Conveniently transfer funds from your Savings Account to your Fixed Deposit and benefit from some of the best Fixed deposit interest rates out there.

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision