Bank fixed deposit schemes are once again drawing the attention of investors due to the current volatility and increase in interest rates. Bank FDs are secure and give you the option of receiving a lump sum interest income at the end of the tenure and regular pay-outs, depending on the type of FD you choose. Let’s look at the key features of the FD variants.
Cumulative & Non-cumulative FDs
Fixed deposits are of two types – Cumulative and non-cumulative.
Non-cumulative fixed deposits offer a regular payout to investors. These periodical payouts could be on a monthly, quarterly, half-yearly or yearly basis. For example, you have invested Rs 100,000 for three years in a non-cumulative FD with monthly interest payout option. If the interest offered by the bank is 8% p.a., you’ll get interest income of Rs 666.66 (8% of 100000/12) every month through such investment i.e., Rs 8,000 in one year.
In a cumulative FD product, the interest accrued on your investment is reinvested, and hence you get the benefit of compounding return. So, the yield gets added to the principal amount. Say, you invested Rs 100,000 in a cumulative FD for one year at interest 8% p.a., compounded on a quarterly basis. On completion of the tenure, you’ll get interest income of Rs 8234.2, i.e. an absolute return of 8.24%.
Cumulative FD schemes, therefore, can be called money multiplier schemes, while in a non-cumulative FD scheme, interest is payable at fixed frequencies.
Which type of FD should you opt for?
Non-cumulative FDs are suitable for investors looking for a regular income, such as retirees or pensioners. This implies that they can invest a lump-sum amount in a non-cumulative FD and earn a regular income every month.
Cumulative FDs are suitable for creating a deposit over a longer term. The interest rate on a cumulative FD is usually higher than that of a non-cumulative FD. All non-cumulative FD products are taxable, but under the cumulative option, you can invest in tax-saving FDs with five-year investment tenure.
The prevailing interest rate on cumulative FDs offered by some prominent banks are mentioned below:
People who are looking to save money through cumulative FDs can opt for alternatives such as lump sum investments, or linking of the savings account with the sweep-in FD to create a bigger corpus.
(The writer is CEO, BankBazaar.com)