There are several choices that you have to make while opening fixed deposits, including not just the amount and tenure, but also the frequency of compounding. Should you choose to compound the returns and receive the total amount at maturity or opt for interest payouts at intervals (monthly or quarterly)? Let us look at the answer in this article.
Types of FDs- Cumulative and Non-Cumulative
There are two kinds of fixed deposits, depending on the payout mode, i.e. non-cumulative and cumulative FDs. Here’s looking at them briefly.
Cumulative FDs-
- They pay interest only at the time of maturity while refunding the principal amount as well.
- The interest you receive throughout the FD tenure is compounded and reinvested.
- You can choose the FD tenure when opening your account.
- The total interest paid is higher than non-cumulative FDs.
Non-Cumulative FDs-
- The interest is compounded at shorter intervals and paid out every month, quarter, year, or even six months.
- Other payment frequencies may also be provided by some banks and financial institutions.
- You can select the frequency of interest payouts while opening your FD account at a small finance bank or any other institution.
- The total interest is lower than cumulative FDs.
- You should also note that no fixed interest is payable on a monthly, quarterly, yearly, or half-yearly basis in cumulative FDs.
Interest Earnings from Cumulative and Non-Cumulative FDs
Let us take an example of the anticipated returns from both these types, considering a principal amount of Rs. 10 lakh and an interest rate of 7.50%.
Interest Earnings from Cumulative FDs-
Suppose you invest Rs. 10 lakh for 10 years at 7.50%. In this case, you will get a total of Rs. 21,02,349 after maturity. This gives you interest earnings of Rs. 11,02,349 on your investment.
Interest Earnings from Non-Cumulative FDs-
If you choose monthly payouts, then the total maturity amount on Rs. 10 lakhs at 7.50% will be Rs. 17,50,000 for the same duration. The interest income is thus Rs. 7,50,000 on your investment.
Hence, the interest income will increase if you compound your returns and receive the total payout only at maturity.
Conclusion- Which One Should You Choose?
It all boils down to your financial goals, income, liquidity needs, and immediate requirements. If you are okay with a longer lock-in period and want to build wealth for future requirements, compounding is the best way forward. It will help you get higher interest earnings and a substantial corpus that you can use for varied purposes. Of course, you should also be okay with lower liquidity in this case. These FDs are helpful when it comes to accomplishing future goals like buying a house, saving money for retirement, or meeting the higher education costs of children.
On the other hand, if you are okay with the lower interest income but genuinely require an income stream every month or quarter, choose non-cumulative FDs. They are often suitable for seniors who need a fixed income at intervals and are thus popular choices after retirement.
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