What is Cumulative vs Non-Cumulative FDs ?

A Fixed Deposit (FD) is a safe and reliable investment option for anybody who is looking to earn steady returns with minimal risk. If you are looking to open an FD Account, you are bound to come across two primary options – Cumulative FDs and Non-cumulative FDs. Both of these deposits offer distinct features and benefits and it is essential for you to understand the differences. It will help you in taking a more accurate and informed decision. In this comprehensive guide, we will compare and contrast the features of both to help you choose the most suitable option for your financial goals

Cumulative Fixed Deposits  

Cumulative FDs are an excellent choice for investors who are looking for a long-term investment plan. In a Cumulative FD, the interest is compounded annually and reinvested along with the principal amount. The interest earned in each financial year is added to the initial investment, resulting in higher overall returns at maturity.

Benefits of Cumulative FDs:

• Higher returns on maturity:

The compounding effect leads to increased returns on the Cumulative FD, making it an attractive option for long-term investors.

• Ideal for long-term goals:

Cumulative FDs are well suited for individuals with long-term financial objectives such as retirement planning or buying a house.

• Convenient and hassle-free:

Investors do not have to worry about periodic interest payouts as the interest is reinvested in the FD until maturity

Non-cumulative Fixed Deposits

Non-cumulative FDs are designed for investors who are seeking regular interest income at periodic intervals. The interest is paid to the investor on a monthly, quarterly, half-yearly or annual basis depending on the chosen frequency.Cumulative FDs are an excellent choice for investors who are looking for a long-term investment plan. In a Cumulative FD, the interest is compounded annually and reinvested along with the principal amount. The interest earned in each financial year is added to the initial investment, resulting in higher overall returns at maturity.

Benefits of Non-cumulative FDs: 

• Steady income stream:

Non-cumulative FDs provide a regular and predictable income stream to investors, making them suitable for individuals who rely on the fixed interest earnings to meet their financial needs.

• Flexibility in payout options:

Investors can choose the frequency of interest payout based on their cash flow requirements, providing flexibility in managing the finances.

Here are the key things to consider:

• Financial goals: Define your financial objectives clearly. A Cumulative FD might be more suitable if you are looking for long-term wealth accumulation and can forego periodic interest payouts. On the other hand, if you require regular income for monthly expenses or specific financial goals, a Non-cumulative FD would be a better choice.
• Liquidity needs: Assess your liquidity needs and emergency fund requirements. A Cumulative FD locks your funds until maturity while a Non-cumulative FD allows you to receive regular interest payouts. If you anticipate the need for funds in the short term, a Non-cumulative FD provides more flexibility in accessing the interest earnings.
• Risk vs Reward: Consider your risk appetite. Both Cumulative and Non-cumulative FDs are relatively low risk investments. However, a Cumulative FD may offer higher returns at maturity due to the power of compounding. At the same time, a Non-cumulative FD provides steady and predictable income which is suitable for the investors who are looking for low risk investments.
• Tax implications: Evaluate the tax implications of both the options. Interest is reinvested and added to the principal amount, leading to a higher tax liability upon maturity.

Investment rate and tenure plans

• Interest rate and tenure: Compare the interest rates and tenure options for both the FDs. Analyse the prevailing interest rates and any special rates or promotions offered by the bank. Additionally, consider the tenure that aligns with your investment horizon.
• Reinvestment opportunities: If you choose a Cumulative FD, evaluate the potential reinvestment opportunities after maturity. Determine whether you plan to reinvest the entire maturity amount or require a portion for specific financial goals.
• Financial planning: Review your overall financial plan and assess where the FD fits into your investment portfolio. Diversification is crucial in financial planning and depending solely on FDs may not be sufficient for long-term wealth creation.
• Interest payout frequency: If you opt for a Non-cumulative FD, select the interest payout frequency that best suits your needs. Whether you prefer monthly, quarterly, half-yearly or annual interest payouts, ensure it aligns with your cash flow requirements.
• Penalty for premature withdrawal: Check the penalty or loss of interest applicable for the premature withdrawal of the FD. In some cases, choosing a shorter tenure for a Non-cumulative FD might be more beneficial instead of breaking a long-term Cumulative FD.

By carefully considering these factors and conducting a comprehensive analysis, you can make an informed decision between Cumulative and Non-cumulative FDs to maximise your returns and achieve your financial objectives with confidence.

Key Differences

The choice between a Cumulative and a Non-cumulative FD depends on your financial goals and requirements. Cumulative FDs are ideal for long-term investors seeking higher overall returns. While Non-cumulative FDs are for individuals who are looking for regular interest income. ICICI Bank offers both types of FDs allowing you to choose an option that best aligns with your financial objectives. Whether you prefer the convenience of reinvested interest or regular payouts, FDs were and will remain a safe and dependable investment option for growing your savings with ICICI Bank.

Cumulative FD vs Non-Cumulative FD: Which is better for me?

The choice between the two modes of interest payment depends on your preference. If your purpose is to add-on to your existing income or to provide for pension after retirement, non-cumulative FD is your pick.

But, if you are not looking for an add-on but are looking to multiply your existing savings at an exponential rate, you can finalise the cumulative option without a doubt.

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Higher interest paying banks on FD

What is Fixed deposits (FD)?

A fixed deposit (FD) is a tenured deposit account provided by small finance, banks or non-bank financial institutions which provides investors a higher rate of interest than a regular savings account, until the given maturity date. It may or may not require the creation of a separate account. Higher interest paying banks on FD with various benefits are explained below.,

FD interest rates in July 2024: Many banks have revised their fixed deposit interest rates effective July 1, 2024 for amounts below Rs 3 crore. Note that some banks have updated the date and rates remain the same. Check which bank offers the highest interest rates after the revision.

Small Finance Bank Fixed Deposit Rates

• Fixed deposits are one of the most popular modes of investment in India. Fixed deposits are considered to be risk-free investments that guarantee assured returns on maturity with attractive interest rates.
• Flexible tenures ranging from 7 days to 10 years, and tax benefits for the category of Tax Saver FDs which have a tenure of 5 years. Banks, Non-Banking Finance Companies (NBFCs), and small finance banks offer fixed deposit facilities in India.

Benefits

• Customers can avail loans against FDs up to 80 to 90 percent of the value of deposits. The rate of interest on the loan could be 1 to 2 percent over the rate offered on the deposit.
• Residents of India can open these accounts for a minimum of seven days.
• Investing in a fixed deposit earns customers a higher interest rate than depositing money in a saving account.
• Tax saving fixed deposits are a type of fixed deposits that allow the investor to save tax under Section 80C of the Income Tax Act.

Simple to Understand

As safe an option FD is, it is equally easy to comprehend too. For an amount of Rs. 1 lakh for 1 year @ 8% interest, there will be a profit of Rs. 8,243 (quarterly compounding). No market fluctuation shall bring this amount down. There is no need to monitor the FD on a daily basis, unlike other investment instruments like equity funds. There are no market-related dips involved in FD.

Who should Invest in Fixed Deposits?

1. If you’re someone who does not want to take market-related risks and is okay with decent returns, FD will work well for you.
2. If you have taxable income and are looking for a tax-saving safe investment option, you should consider FD. It will allow you up to Rs. 1.5 lakh of Income Tax Deductions u/s 80C of the IT Act.
3. If you’re a retired person who wants a regular income, invest your savings in different FD schemes across various banks and go for the non-cumulative option. In this option, you will get the regular interest that will act as your income post-retirement.
4. If you’re a housemaker who has a certain amount to invest, it would be good for you to analyse the FD option. This is because fixed deposits do not carry any significant risk.
5. Higher interest paying banks on FD, when ever getting FDs are classified into two cumulative and non cumulative FDs. where as returns for cumulative FDs are bit higher than the non-cumulative FDs.

Scheduled Banks offering highest FD interest rates – 6.50% p.a. and above

Amongst all bank categories, small finance banks are offering the best FD interest rates. Higher interest paying banks on FD Within the scheduled small finance bank category, Unity Small Finance Bank and North East Small Finance Bank offer the highest FD interest rate of 9.00% p.a. Among scheduled private sector banks, SBM Bank offers the best FD interest rates of up to 8.40% p.a. for a tenure of above 3 years 2 days to less than 5 years. Among scheduled public sector banks, Punjab & Sind offers the highest fixed deposit interest rates of up to 7.30% p.a. on tenure 666 days.

Here are banks and  higher interest rates according to tenure

Fixed deposits (FDs) are a popular investment option, Higher interest paying banks on FD especially for those seeking safety and predictable returns. Here are the advantages and disadvantages of fixed deposits:

Advantages:

• Safety: Fixed deposits are considered one of the safest investment options since they are not subject to market risks. Most banks offer insurance on fixed deposits up to a certain limit (e.g., in the US, the FDIC insures deposits up to $250,000).
• Guaranteed Returns: The interest rate is fixed at the time of investment and remains constant, ensuring a predictable return.
• Flexible Tenures: Fixed deposits come with flexible tenure options, ranging from a few months to several years.
• Higher Interest Rates than Savings Accounts: Fixed deposits generally offer higher interest rates compared to regular savings accounts.
• Tax Benefits: In some countries, certain types of fixed deposits qualify for tax benefits under specific sections of the income tax laws.
• Loan Against FD: Investors can avail of loans against their fixed deposits, providing a way to access funds without breaking the FD.

Disadvantages:

• Lower Returns Compared to Other Investments: Fixed deposits typically offer lower returns compared to other investment options like stocks, mutual funds, or real estate.
• Penalties for Premature Withdrawal: Withdrawing the fixed deposit before maturity usually incurs a penalty, reducing the overall return.
• Taxable Interest: The interest earned on fixed deposits is generally subject to tax, which can reduce the effective return.
• Lack of Diversification: Investing a large portion of funds in fixed deposits can lead to a lack of diversification in an investment portfolio.
• Interest Rate Risk: In a rising interest rate environment, the fixed rate on an FD may become less attractive compared to new FDs offering higher rates.

Overall, fixed deposits are suitable for risk-averse investors looking for stability and guaranteed returns. However, they may not be the best option for those seeking higher returns and willing to take on more risk.

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