Fixed Deposit (FD) is considered to be an excellent option for safe investment. But do you know that there are two main types of FDs – Non-Cumulative and Cumulative? To know which FD is better for you, it is important to understand the difference between these two. Choosing the right FD according to your needs can give you more benefits. Let us know every aspect of both these types in detail.
What are Non-Cumulative and Cumulative FDs?
Non-Cumulative FD
In this FD, you keep getting interest at a regular interval. This interval can be monthly, quarterly, half-yearly, or annually. It is also called ‘Regular Income FD’, because in this, the interest amount keeps getting deposited directly into your bank account. This is a good option for those who need a fixed income every month or quarter, such as pensioners or retired people.
Cumulative FD
In this FD, the interest amount keeps getting added to your principal. You get the interest payment all at once on maturity of the FD. The biggest advantage of this FD is that you get the benefit of compounding interest, which makes your total deposit amount grow rapidly. This is great for those who want high returns in the long term and who do not need regular income.
Do banks tell customers about these options
When you go to open an FD account, be sure to get complete information from the bank. Usually, bank officials discuss the duration of the FD, interest rate, and interest payment options (monthly, quarterly, half-yearly, or on maturity). But many times, customers choose any option without understanding these options. Therefore, it is your responsibility to be aware and choose the right FD according to your financial needs.
Is the interest rate different in both FDs
In most cases, the interest rate on cumulative FDs is slightly higher than that of non-cumulative FDs. This is because in cumulative FDs, the interest amount is continuously added to your principal, giving the bank a chance to reuse that amount. In contrast, in non-cumulative FDs, the interest amount is directly credited to your account. However, this difference is not very big and depends on the bank’s rules.
How to choose the right FD
To choose the right FD, first assess your financial situation and goals.
If you need regular income for everyday expenses, if you want to increase your income every month or quarter, or if you depend on the interest you get from your FD, then non-cumulative FDs can be the right choice for you.
On the other hand, if your goal is to accumulate a large sum for the long term, such as a down payment for buying a house or children’s higher education, or if you want to take full advantage of compounding and do not need a regular income, then a cumulative FD is better for you.
Before choosing an FD, make sure to know all the terms and conditions from the bank. Choosing the right FD as per your needs will not only give you security but also the best returns.