What is a Cumulative Fixed Deposit

Saving and investing are two closely related aspects that go hand-in-hand when you are trying to put together financial planning. So, if you are about to start a journey that holds the potential to fulfil your long-term wealth creation goals, investing in a cumulative fixed deposit scheme can be a good option. 

Before you make your first investment, consider exploring the benefits of a cumulative FD account in this blog. 

Understanding Cumulative Fixed Deposits

Often termed cumulative FD, these are specialised plans provided by different financial institutions and banks. Investors who participate in these schemes, do not receive interest payouts periodically. Contrarily, the accrued interest is added or reinvested to the principal amount every year. 

This reinvesting allows your money to grow exponentially through the power of compounding. Therefore, for the same tenure, interest rate and principal amount, cumulative FDs offer better returns than non-cumulative FDs.

How Do Cumulative FDs Work?

Cumulative fixed deposits offer compound interest income. This means you earn interest on both your initial deposit and the interest accrued over time. Here’s a step-by-step breakdown of how it works to give you a clear idea about the suitability of a cumulative fixed deposit:

• You make an initial deposit to a fixed deposit provider. While contributing, you should select a relevant tenure for your investment.
• The fixed deposit providing bank or NBFC guarantees to offer a set interest rate at the end of the tenure.
• Next, your annual interest returns are automatically reinvested back into your investment and not paid out periodically (annually/ quarterly/ monthly).
• After reinvestments, the base principal amount in your FD account increases for the following year. This creates a growing base for interest calculation. 
• The above-mentioned procedure continues throughout the plan term, enabling you to experience exponential benefits from the compounding effect. 
• At the maturity of your cumulative fixed deposit, you get the final amount. 

For instance, suppose you deposit ₹2.50 lakh in a cumulative FD scheme for 3 years. The plan offers a yearly interest of 7.25% p.a. In such a scenario, your interest grows like this:

Interest Credited in Year 1: ₹18,125 (₹2,50,000 * 7.25%)

New Principal: ₹2,68,125 (₹250,000 + ₹18,125)

Interest Credited in Year 2: ₹19,439.06 (₹2,68,125 * 7.25%)

New Principal: ₹2,87,564.06 (₹2,68,125 + ₹19,439.06)

Interest Credited in Year 3: ₹20,848.39 (₹287,564.06 * 7.25%)

New Principal: ₹308,412.46 (₹287,564.06 + ₹20,848.39)

Thus, as you can see, the above cumulative fixed deposit account will produce an overall interest return of ₹58,412.45 (18,125 + 19,439.06 + 20,848.39) over a span of 3 years. Additionally, at the time of maturity, you can expect a total value of ₹308,412.46, which will be subject to taxation as per your income tax slab rate. 

Cumulative Fixed Deposit Rates

On the Stable Money app, you can find cumulative fixed deposit schemes offering interest rates between 5.30% - 7.80% p.a. So, as an investor, you can fulfil different key milestones like saving for your children’s wedding, buying a new car, etc. by utilising the benefits of these schemes. 

Suppose you invest ₹3 lakhs in a cumulative fixed deposit offering 7% p.a. interest for varying tenures. In that case, you will receive a maturity amount of:

Note: The above calculations are based on the assumption of a guaranteed interest rate from various fixed deposit providers. 

Benefits of Opening a Cumulative Fixed Deposit Account

You get many benefits upon opening a cumulative FD account, such as:

• Enjoy Higher Returns

When compared to regular or standard FDs, the cumulative counterpart generates more interest as the returns are reinvested instead of being paid out periodically. 

• Build Financial Discipline

As the whole amount (principal and interest) is paid during maturity, these fixed deposit accounts instil the habit of saving and discourage premature withdrawals. 

• Get a Safety Net

These schemes are free from market fluctuations and are low-risk investments, just like any other fixed deposit schemes.

• Embark on a Long-term Financial Journey

Cumulative FDs are a good option when you want to fulfil long-term financial goals. For instance, you can download the Stable Money app and explore the various options, some of which offer up to 9.50% p.a. interest per year.

Difference Between Cumulative and Non-Cumulative Fixed FD Accounts

The basic difference between cumulative and non-cumulative FD options is their interest payment frequency. When you opt for the former option, you are entitled to receive a single payout upon maturity. On the other hand, non-cumulative fixed deposits give you monthly/ quarterly/ half-yearly or even annual options for receiving the accrued interest. 

Additionally, you may refer to the comparison table below to understand the other points of difference.

Final Word

A cumulative fixed deposit account is a straightforward yet quite effective instrument to protect your capital and secure consistent financial growth. Whether your goal is funding your children's higher education or securing your own retirement, these FDs can help you build a substantial financial reserve. Thus, you may want to include them in your investment portfolio soon.

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