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Cumulative Deposit – What Is Cumulative Fixed Deposit
Posted on Friday, February 23rd, 2024 | By IndusInd Bank
A fixed deposit (FD) is a financial tool wherein an individual invests a lump sum amount with a bank or financial institution for a predetermined duration. The rate of interest remains constant throughout the tenure. At the end of the tenure, the total amount the depositor receives is the sum of the principal and the compounded interest. Fixed deposits are considered low-risk investments, and the interest rate is higher than regular savings accounts. FDs are known for their stability and predictability and are a safe investment option. Types of fixed deposits include regular fixed deposits, cumulative fixed deposits, non-cumulative fixed deposits, senior citizen fixed deposits, tax-saver fixed deposits and so on.
Before opting for any type of fixed deposit, it’s important to understand the terms, interest rates, and associated features to align with your financial goals and requirements. Now let us understand what cumulative FD is and who may opt for it.
What is a Cumulative Fixed Deposit Account?
A cumulative fixed deposit account is a type of fixed deposit where the interest earned on the deposit is not paid out periodically but instead gets added to the principal amount. The interest compounds over time, and the total amount (principal + accumulated interest) is paid out at the end of the deposit tenure. This can result in higher overall returns compared to non-cumulative fixed deposits.
Cumulative FDs provide a fixed and known interest rate. The total maturity amount is predetermined at the time of investment, providing a clear picture of the returns one can expect at the end of the deposit period.
Also Read: Book your Fixed deposit online in just three steps
Now let us understand the differences between a cumulative FD and Non-cumulative FD
Both cumulative and non-cumulative deposits are types of fixed deposits, but there are a few differences mentioned below.
| Parameter | Cumulative FD | Non- Cumulative FD |
| Interest Pay Out | The interest is not paid out periodically. Instead, it gets added to the principal amount, and the total is paid at the end of the deposit tenure. | Interest is paid out, monthly, quarterly, or annually, providing a steady income stream during the deposit period. |
| Compounding | Interest compounds over the entire tenure, leading to higher overall returns. | Since interest is paid out periodically, it doesn’t compound on the original principal. |
| Suitability | Suitable for those who don’t need regular interest income. | More suitable for individuals seeking periodic interest payments. |
| Liquidity | Limited liquidity during the deposit term. | Provides regular liquidity with interest pay-out. |
| Income | No income is generated during the FD tenure. | Regular income flows throughout the FD tenure. |
Who Should Opt for a Cumulative Deposit Account?
A cumulative deposit account has various benefits. It is suitable for individuals:
- Who have long-term financial goals and can leave their funds invested for the entire deposit tenure.
- Who prefer a fixed and predictable return, mitigating exposure to interest rate fluctuations.
- Who save for specific goals such as education, home purchase, or retirement.
- Who are seeking the benefits of compounding leading to higher overall returns.
- Who have stable income, such as salaried employees and business people, and can manage with a lump sum at the end of the deposit period.
- Who are comfortable with limited liquidity.
However, it is important to consider financial goals, liquidity needs, and risk tolerance before choosing between both options.
In summary, a cumulative fixed deposit is ideal for long-term investors seeking higher overall returns through compounding. It provides a predictable lump sum paid at maturity, increased savings over time, and suits those comfortable with limited liquidity during the deposit term.
Click here to open your fixed deposit account with IndusInd Bank today!
Disclaimer: The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and 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.
