I don’t understand this. Help me understand what is cumulative and non cumulative fd.
The difference between cumulative and non cumulative FD is pretty straight forward. Cumulative FD or cumulative fixed deposit offers a lump sum amount on maturity with compounded interest earned over the investment period. A non-cumulative fixed deposit works on the regular payout model. This means you receive monthly, quarterly or semi-annual returns on the FD invested. This is essentially what is cumulative and non cumulative FD. I can help you understand this better with an example.
Suppose, you have opened two FDs, a cumulative and a non cumulative one.
Cumulative FD: Investment amount ₹1,00,000 for 5 years at 6.5% interest.
| Year | Principal + Interest |
|---|---|
| 1 | ₹1,06,500 |
| 2 | ₹1,13,422.50 |
| 5 | ₹1,37,009 |
Non cumulative FD: Investment amount of ₹1,00,000 for 5 years at 6.5% annual interest.
| Year | Interest Payout |
|---|---|
| Every Year | ₹6,500 |
| Maturity | ₹1,00,000 (principal) |
To give you a final context, a cumulative FD is best if you are aiming for long term savings and want to maximize returns with compounding. While, non cumulative FD is best if you are a retiree, a freelancer or someone who is eyeing regular income.
Let me know if you have any more questions.