What is Best for You? Monthly, Quarterly Payouts or Interest on Maturity of Fixed Deposit How to choose the interest payment frequency on your Fixed Deposit?

When you invest in a fixed deposit, you will earn interest on the FD at the rate specified by the bank or the financial institution. The interest rate on fixed deposits typically depends on many factors like the amount deposited, the tenure of the deposit and the repo rates in the economy. That said, the interest earned on your fixed deposit can be paid out to you at different points in time.

You can typically choose to receive the interest on a periodic basis. The returns on your deposit in this case, are non-cumulative and paid out on a monthly, quarterly, half-yearly or annual basis, as per your choice.

Alternatively, you can choose to receive the returns only at maturity, in a cumulative manner. In this case, the interest on your FD that is accumulated over the tenure is paid out only at maturity. 

Cumulative vs Non-Cumulative FD

Both cumulative and non-cumulative fixed deposits have their own merits and downsides. The ideal choice for you depends on your individual financial needs and goals. To understand how to make a choice between the two, let’s take a closer look at how these deposits work.

How do Cumulative FDs work?

Cumulative fixed deposits essentially reinvest the interest earned and thereby lead to compounding of the returns. This way, you earn interest on the accumulated interest. That is how the power of compounding works. Let’s look at an example to understand this better.

Say you invest ?1 Lakh in a cumulative fixed deposit for a tenure of 5 years. This means that the interest on FD will be reinvested and paid out only at maturity. Assuming an interest rate of 7% per annum, you will receive around ?41,478 as interest at the end of 5 years.

How do Non-cumulative FDs work?

In the case of non-cumulative fixed deposits, the interest is not reinvested in the FD. Rather, it is paid out to you on a monthly or a quarterly basis. This essentially means you do not benefit from the magic of compounding. However, non-cumulative fixed deposits have other benefits, as you’ll see below. If you opt for this kind of FD, you can use a quarterly or a monthly FD interest calculator to understand how much you will earn.

Let’s take the same example discussed above to see how regular payouts work. In case you invest ?1 Lakh in a non-cumulative fixed deposit for a tenure of 5 years at 7% per annum, you will earn around ?583 on a monthly basis. This will lead to a total return of around ?34,999.

The Pros and Cons of Cumulative vs Non-Cumulative FDs

Both fixed deposit types have their own advantages and disadvantages. Here is a preview of the pros and cons of FDs that offer regular payouts and those that reinvest the interest.

Cumulative Fixed Deposits

The two main advantages of this kind of fixed deposit are that it offers higher overall interest earnings and it leads to compounding of returns. However, it offers no regular interest payouts, which may be a challenge if you’re looking to fund regular expenses.

Non-cumulative Fixed Deposits

The primary advantage of non-cumulative FDs is that you get periodic payouts at intervals that are convenient for you (such as monthly, quarterly, half-yearly or annual payouts). But since your returns are paid out periodically, the returns on these deposits are lower than cumulative fixed deposit returns.

Monthly/Quarterly Payouts or Interest on Maturity: Which one to Choose?

The choice between these two options depends on your financial goals and requirements. Typically, it would be prudent to choose periodic payouts from your fixed deposit in the following cases:

• If you are retired and looking to earn periodic income
• If you are a freelancer or a self-employed person seeking a stable source of regular income
• If you need a regular source of primary or secondary income
• If you want to prioritise regular income earnings over higher returns

On the other hand, it may be a more prudent choice to opt for interest on FD at maturity in case you meet any of the following criteria.

•        If you are a salaried person looking to build a retirement corpus
•        If you already have any other source(s) of regular income
•        If you want to earn compounded returns on your fixed deposit investments

This should give you a better idea of what cumulative and non-cumulative fixed deposits are and how they work. And now that you know when to choose the right kind of interest payout, you will be able to make a more prudent investment decision in case you wish to open a fixed deposit any time soon.

If you do opt for regular payouts over the tenure of the fixed deposit, you can always make use of a quarterly or a monthly FD interest calculator to get a better idea of the exact amount of returns you will earn on your deposit. This will help you plan your monthly budget at home accordingly. 

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