A Cumulative Fixed Deposit (FD) is a popular investment option in India, known for its simplicity and guaranteed returns. This type of FD helps you save money securely while earning interest over a fixed period. It is ideal for those who do not need immediate access to their money but wish to grow their savings steadily.
How Does a Cumulative FD Work?
In a cumulative FD, you deposit a lump sum amount for a fixed tenure. It could range from 1 year to 10 years or more. The bank or financial institution pays interest on this amount at regular intervals (quarterly, semi-annually, or annually). However, instead of giving you the interest during the tenure, it is reinvested with the principal. Thus it helps it grow faster.
This reinvestment allows your interest to compound, meaning you earn interest not just on your initial deposit, but also on the interest already accumulated. The longer the duration, the more the compound interest works in your favor.
Key Features of Cumulative Fixed Deposits:
- Interest Compounding: The interest earned is added to the principal, and it compounds over time. This means the longer you leave your money in the FD, the more interest you will earn.
- Fixed Tenure: The investment has a fixed tenure, typically ranging from 1 year to 10 years, and the interest is paid out at the end of the term.
- No Periodic Payouts: In other FDs where you get interest payouts periodically (monthly, quarterly, or yearly). In a cumulative FD, interest accumulates and is paid out with the principal at the end.
- Higher Returns: Since the interest compounds over time, you can earn significantly more compared to other types of FD investments.
Example of a Cumulative Fixed Deposit:
Let’s say you invest ₹1,00,000 in a cumulative fixed deposit with an annual interest rate of 6% for 5 years. Here’s how it works:
- Principal Amount: ₹1,00,000
- Interest Rate: 6% per annum
- Tenure: 5 years
In the first year, the interest earned would be ₹6,000 (6% of ₹1,00,000). Instead of paying you this amount, the bank adds it to the principal, making your new principal ₹1,06,000. In the second year, the interest will be calculated on this new amount, which is ₹1,06,000. As a result, you will earn ₹6,360 as interest for the second year, and this continues each year.
At the end of 5 years, your total amount will be much more than your initial ₹1,00,000, thanks to the compounding effect.
Why Choose Cumulative FDs?
- Long-Term Growth: Perfect for individuals who do not need immediate access to funds and are looking for long-term financial growth.
- Risk-Free: FDs are considered a safe investment option since they are not affected by market fluctuations.
- Taxable Returns: However, the interest earned is taxable, so it’s important to consider tax implications when investing in a cumulative FD.
Conclusion:
Cumulative Fixed Deposits are an excellent way to grow your savings safely and steadily, especially for long-term goals. They provide the benefit of compounding interest, making them a preferred option for investors looking for guaranteed returns with minimal risk. Whether you’re saving for a child’s education, a retirement fund, or just for future security, a cumulative FD can help you achieve your financial goals.
– Ketaki Dandekar (Team Arthlogy)
Read more about Cumilitive Fixed Deposits here – https://groww.in/cumulative-deposit