What Do You Mean by Cumulative Interest on Fixed Deposit?

What Do You Mean by Cumulative Interest on Fixed Deposit?

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It is essential to invest in wealth-generating instruments to earn an additional flow of income in the long run to meet your financial objectives. You can invest your hard-earned money in equities, mutual funds, unit-linked insurance plans, and fixed deposits (FDs), among other products. However, you need to consider your risk-bearing capacity while making investments.

Investments in equities, ULIPs, and mutual funds are linked to the equity market. So, the returns are completely dependent on the performance of the market. These avenues offer high returns but at a greater risk. Conversely, investing in FDs is a  risk-free way to earn guaranteed returns. Depending on the type of fixed deposit that you opt for, you will earn the interest either as a regular payout or a lump-sum on maturity.

You can choose between non-cumulative and cumulative FDs. Let us make you understand the difference between these options.

In the case of non-cumulative FDs, you will receive regular payouts, which can be either monthly, quarterly, half-yearly, or annually. For instance, assume you have a fixed deposit of INR 2 lakh for two years with a quarterly payout option. Here, if your financial institution offers an interest of 7% per year, you will earn a quarterly return of INR 3,500 (INR 14,000 divided by 4) until the FD matures.

In cumulative FDs, the income that you earn from the interest on the principal investment value is reinvested. Here, you can reap the benefits of compounding. So, your funds will grow more, as the income earned from the reinvested amount will be added to the principal value. For instance, if you have invested INR 2 lakh for a five-year duration, then with an interest rate of 8% per year, which is compounded quarterly, you will earn cumulative interest on fixed deposit at around 8.24% per annum until the FD’s maturity.

Which type of FDs is ideal for you?

If you are a retiree and looking for regular income, you can select the non-cumulative FD. However, if you are looking for a long-term investment avenue, you can consider opting for cumulative FDs. The advantage of investing in a cumulative FD is that it offers higher fixed deposit interest rates compared to non-cumulative FDs. The income that you earn via non-cumulative FDs is taxable. On the other hand, the income that you receive from tax-saving cumulative FDs is tax-exempt. Usually, these FDs are for a tenure of five years.

Now that you know which FD is suitable for you as per your life scenario, invest in one with a credible financial institution. Mahindra Finance offers promising FD rates. Visit its website to learn more about the fixed deposit eligibility criteria.

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