Benefits Of Cumulative Fixed Deposit For Long-Term Savings

Introduction

Saving money is an essential part of financial planning, and there are various avenues available to grow your savings. One such option is a cumulative fixed deposit (FD), which offers unique benefits for long-term savings. 

In this article, we will explore the advantages of choosing a cumulative FD and understand how it can help you achieve your financial goals.

What are cumulative fixed deposits?

A cumulative fixed deposit is a type of fixed deposit where the interest earned is reinvested or added to the principal amount at regular intervals. Unlike non-cumulative FDs, which provide regular interest payouts, cumulative FDs compound the interest over time and pay it out along with the principal at maturity. This compounding effect leads to higher overall returns on your investment.

Here's an example to better understand how a cumulative term deposit works. Let's say you invest ₹1 lakh in a cumulative FD with an annual interest rate of 8% for a tenure of five years. After the first year, you would earn ₹8,000 in interest. Instead of receiving this amount as a payout, it gets reinvested into the FD along with your initial investment. 

Now, your total investment becomes ₹1,08,000. In the second year, you earn 8% interest on this new principal amount, leading to even higher returns. This process continues until maturity.

Benefits of cumulative fixed deposits

• Compounding Interest: One of the primary advantages of cumulative FDs is the compounding effect. As the cumulative interest on fd is reinvested, it adds to the principal amount, resulting in higher overall returns. The longer you stay invested, the greater the impact of compounding. This makes cumulative fixed deposits an ideal choice for long-term savings.
• Higher Returns: Due to the compounding effect, a cumulative term deposit offers higher returns compared to non-cumulative FDs, especially over longer tenures. By reinvesting the interest instead of receiving regular payouts, you can maximise your savings and potentially earn more in the long run.
• Flexibility in Tenure: Cumulative fixed deposits offer flexibility in choosing the tenure based on your financial goals. Whether you want to save for a short-term goal like a vacation or a long-term goal like retirement, you can select a tenure that aligns with your needs.
• Stable and Secure: Fixed deposits, including cumulative FDs, are known for their stability and security. Your investment is protected from market fluctuations and offers predictable returns over time. This makes cumulative FDs a reliable option for risk-averse investors.
• Goal-Based Savings: Cumulative fixed deposits are an excellent choice for individuals who have specific financial goals in mind. Whether it's buying a car or funding your child's education, a cumulative FD helps you accumulate funds over time to achieve these goals without any financial burden.

Pro tip: To make the most of these advantages, use a cumulative FD calculator to determine the maturity amount and track your earnings over time.

Here is how to use a cumulative FD calculator:

Step 1: Enter the initial or principal amount you are investing in the FD.

Step 2: Input the annual interest rate offered by the bank.

Step 3: Provide the duration of the FD in years or months.

Step 4: Select how often the interest is compounded (e.g., quarterly, half-yearly, or annually).

Once you input all these details, most online FD calculators will automatically calculate the maturity amount and interest earned.

Additional read: Fixed Deposit vs Mutual Funds

Conclusion

Choosing a cumulative fixed deposit can be a wise decision for long-term savings. With its ability to provide higher overall returns, long-term growth potential, flexible tenure options, stable income stream, and tax efficiency, a cumulative FD offers several benefits. 

At Mahindra Finance, we understand the importance of financial planning and offer a range of products to help you achieve your goals. Whether you're saving for a dream vacation or planning for retirement, our team is here to assist you in making informed decisions about your financial future. 

FAQs

1) Is the cumulative interest on fd taxable?

Yes, the cumulative interest on fd is taxable as per the applicable income tax laws. However, if you fall under a lower tax bracket or if your total income doesn't exceed the taxable limit, cumulative FDs can still be beneficial in terms of higher returns.

2) How can I calculate my earnings from a cumulative fixed deposit?

You can use a cumulative FD calculator to determine the maturity amount based on the principal, FD interest rate, and tenure of your investment.

3) Are cumulative fixed deposits suitable for short-term goals?

While cumulative FDs are better suited for long-term goals due to compounding interest, they can also be used for short-term goals depending on the tenure chosen.

4) Can I withdraw funds from a cumulative fixed deposit before maturity?

Cumulative fixed deposits typically have a lock-in period during which funds cannot be withdrawn without penalties or loss of interest. It's important to consider this before investing.