Which is a Better Investment Avenue - Cumulative FDs or Non-Cumulative FDs?

In the lens of today’s rewired investors, investments are not just saving tools, but rather a means to generate income. However, risk is ever-present in every investment, hence, investors strive to reduce the volatility of their investment portfolio. A good way to do this? Spread your investments and reduce exposure to a single asset type.

High-risk investment options like stocks and equities can help to gain high returns. While choosing low-risk options like fixed deposits can add stability, and protect your investment portfolio from market fluctuations and uncertainties.

When it comes to investing in fixed deposits, there are two options to reap maximum benefits--- cumulative and non-cumulative FDs.

 What are cumulative fixed deposits?

Cumulative fixed deposit of investment is benefitted from compounding. When investing in cumulative FDs, the interest earned during the first year of tenure is added to the principal of the second year basis, which the interest is calculated.

Therefore, with every passing year, the interest accumulated also increases. But, bear in mind that the cumulative fixed deposits can only be reaped on its maturity.

Whether building a nest egg for retirement, or saving up for a goal like buying a luxury car or a home, a cumulative fixed deposit will serve you well.

 What are non-cumulative fixed deposits?

Non-cumulative fixed deposits are those where regular interest payouts can be availed as per choice. Just like you’d pick a subscription for a magazine, you can choose whether you want to receive payouts each month, every quarter, on a half-yearly or annual basis. However, the forewarning is that non-cumulative fixed deposits offer lower interest overall, as compounding is out of the equation.

It makes sense to subscribe to this fixed deposit variant if your need for finance is sure to be regular. For instance, as a retired senior citizen it can act as a substitute to a salary. Alternatively, if you’re a freelancer it is a way to ensure that you receive a fixed amount each month or quarter, regardless of the volume of work you’ve signed up for.

 How to choose fixed deposits?

The choice between fixed deposits, depends on preferences. Investors with a need for periodic income choose to invest in non-cumulative fixed deposits, while those who don’t need regular cash flows invest in cumulative fixed deposits.

Irrespective of the choice, a fixed deposit offers plenty of benefits, which make it one of the most sought-after investment avenues. With recent hike in the interest rates, now is the best time to invest in fixed deposits and make most of the returns.

Author: Sachin Sikka - Business Head - Retail & Corporate Liabilities,Bajaj Finance.