Cumulative Fixed Deposits and Non-Cumulative Fixed Deposits Which One Is Good for Senior Citizen
Indians have a fixation for the fixed deposit (FD). The investment instrument works well for across age groups, occupations and objectives, guaranteeing decent returns and full peace of mind.
When it’s about FD, it’s all in the name. You open an FD account with a certain sum at a financial institution for a fixed tenor at a fixed rate of interest. Upon maturity, you receive your principal plus the compounded interest earning. The proceeds are subject to the financial institution and FD tenor. Choosing longer tenors and credible financial institutions can boost your earnings.
FD can be broadly categorized as cumulative FD and non-cumulative FD, based on the interest payout frequency. If you are a senior citizen keen on investing in an FD, choosing between the two options is imperative. Here’s all that you need to know for informed investing decisions.
- Cumulative FD:
As the name suggests, cumulative FD offers interest-earning only once on term expiry. The interest is compounded quarterly or annually, depending on the financial institution. However, you cannot claim them before maturity. Both the accrued interest and the invested amount are automatically reinvested in the existing FD account. That translates into the best FD interest rates and large corpus upon maturity. Unsurprisingly, they call them money multiplier schemes.
- Noncumulative FD:
Noncumulative FD involves multiple interest payouts at given intervals, subject to the pre-agreed terms. Opt for monthly, quarterly, half-yearly or yearly payout frequency; the choice is yours. Note that, the payout frequency and the total proceeds are inversely proportional. If payout frequency is higher, the corpus is lower, and vice-versa. Since compounding is eliminated outright, your interest earnings are compromised, unlike the cumulative FD.
Which one is better for senior citizens?
FD account is not a one-fit solution, as investment objectives vary across investors. Something that works for you might not work for someone else, and vice versa. It’s the each-to-their-own proposition and needs to be addressed accordingly. Here’re a few yardsticks to consider.
- Investment objectives:
It all boils down to what you are saving for. Say, you are saving for your daughter’s destination wedding or property purchase in a posh neighbourhood. To fructify your goals, you need a more significant corpus, which comes from a cumulative FD. Opt for this, if you have a stable income to support your expenses without having to rely on periodic interest payouts.
On the contrary, non-cumulative FD is the way to go, if you need money at regular intervals to meet your day to day expenses. It’s a perfect solution for pensioners needing steady income to support their lifestyle or increased healthcare needs. The non-cumulative FD helps them meet their daily expenses while keeping their total invested amount intact.
- Returns:
When it comes to cumulative versus non-cumulative FD interest-earning, the former beats the latter hands down. The financial institution will reinvest the accrued interest and the principal, leading to increased profits. The cumulative option involves quarterly or yearly compounding. Conversely, the compounding is pushed out of context in a non-cumulative FD. Therefore, you get the best FD interest rates in a cumulative FD. Note that both FD options ensure higher interest earnings than a savings account.
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