What is a Cumulative Fixed Deposit? Meaning & returns

Cumulative Fixed Deposits (FDs) are a popular investment option among individuals looking for a secure and reliable way to grow their savings. Offering a combination of safety, predictable returns, and simplicity, these deposits are an attractive choice for conservative investors.

In this blog, we will explore the meaning of cumulative fixed deposits, how they work, and the returns they offer. Book your Fixed Deposit with Airtel Finance from the Airtel Thanks app today!

What is a Cumulative Fixed Deposit?

A cumulative fixed deposit is a type of term deposit offered by banks and financial institutions where the interest earned is not paid out periodically but is instead, compounded and paid at maturity along with the principal amount. Unlike non-cumulative fixed deposits, which pay interest monthly, quarterly, or annually, cumulative FDs accumulate interest over the entire tenure of the deposit.

Read more: What is a fixed deposit and how does it work?

How Do Cumulative Fixed Deposits Work?

When you invest in a cumulative FD, you deposit a lump sum amount for a specified tenure, which can range from a few months to several years. The interest rate is fixed at the time of deposit and remains constant throughout the tenure. The key feature of cumulative FDs is that the interest is compounded, usually quarterly or annually, and added to the principal amount. At the end of the tenure, you receive the original principal along with the accumulated interest.

For example, if you invest ₹10,000 in a cumulative FD with an annual interest rate of 6% for five years, the interest earned each year will be added to the principal. At the end of the five-year period, you will receive the initial ₹10,000 plus the compounded interest.

Benefits of Cumulative Fixed Deposits

Cumulative fixed deposits offer several benefits that make them an attractive investment option:

Higher Returns Through Compounding

The primary advantage of cumulative FDs is the power of compounding. Since the interest is added to the principal and reinvested, your investment grows at an accelerated rate. Over time, this can result in significantly higher returns compared to non-cumulative FDs, where the interest is paid out periodically and not reinvested.

Predictable and Secure Returns

Cumulative FDs offer predictable returns, as the interest rate is fixed at the time of investment. This makes them a low-risk investment option, ideal for conservative investors who prioritize capital preservation. Additionally, deposits in banks are often insured up to a certain limit, providing an extra layer of security.

Ease of Management

With cumulative FDs, there is no need to manage periodic interest payouts or reinvestment decisions. The interest is automatically compounded and added to the principal, making it a hassle-free investment. This is particularly beneficial for investors who prefer a “set and forget” approach to their investments.

Read more: Difference between fixed deposit and recurring deposits

Returns on Cumulative Fixed Deposits

The returns on cumulative fixed deposits depend on several factors, including the interest rate, the tenure of the deposit, and the frequency of compounding. Generally, the longer the tenure and the higher the frequency of compounding, the greater the returns.

Interest Rates

Interest rates on cumulative FDs vary based on the financial institution, the amount invested, and the tenure of the deposit. Banks and financial institutions typically offer competitive rates to attract investors. It’s essential to compare rates from different providers to find the best deal.

Compounding Frequency

The frequency of compounding significantly impacts the returns on cumulative FDs. Interest can be compounded quarterly, half-yearly, or annually. Quarterly compounding typically results in higher returns compared to annual compounding, as the interest is added to the principal more frequently.

Read more: How to apply for premature withdrawal of fixed deposit

FAQs

What is the difference between cumulative and non-cumulative fixed deposits?

In cumulative fixed deposits, the interest is compounded and paid at maturity along with the principal. In non-cumulative fixed deposits, the interest is paid out periodically (monthly, quarterly, or annually) and not compounded.

Are cumulative fixed deposits safe?

Yes, cumulative fixed deposits are considered safe investments. They offer predictable returns and are typically insured up to a certain limit by deposit insurance schemes, depending on the country.

How does the frequency of compounding affect the returns on cumulative FDs?

The more frequently the interest is compounded, the higher the returns. Quarterly compounding results in higher returns compared to annual compounding because the interest is added to the principal more frequently.

Can I withdraw a cumulative fixed deposit before maturity?

Yes, you can withdraw a cumulative FD before maturity, but it may attract a penalty. The penalty and the applicable interest rate will depend on the terms and conditions of the financial institution.

What are the tax implications of cumulative fixed deposits?

The interest earned on cumulative fixed deposits is subject to tax as per the investor’s income tax bracket. Some countries may also have specific tax-saving fixed deposit schemes that offer tax benefits.

In conclusion, cumulative fixed deposits are an excellent investment option for individuals seeking secure and predictable returns. By understanding how they work and the factors affecting their returns, investors can make informed decisions and maximize the benefits of this investment.