When it comes to long term investment, financial planning becomes crucial. There are many questions that investors need to answer like: short term goals (less than a year), medium-term goals (1-3 years), long term goals (>3 years).
Hence, they may want to know how their money will grow at different rates of return. That is why financial calculators play a very crucial role.
What is an investment calculator?
An investment calculator is a tool used for calculating investment returns, the future value of money, tenor, periodic investment values, etc. It can help an investor make investment decisions.
One can find these tools online or calculate them using simple spreadsheet models. The investor only needs clarity on the input parameters to estimate a good future value to meet his retirement, wedding, children’s education, or other needs.
These investment calculators help investors calculate the exact amount of periodic and lump-sum investments they must save/invest each month/year to meet their financial goals. They can run various simulations over different periods or rates of returns to finalise the amount they need to invest.
Here are basic calculators one might want to use for calculating return on investments:
1. Future Value of Investment:
FV = PV (1+R)^n
Where,
FV = Future Value of Investments
PV = Present Value of Investments
R = Expected rate of return
N = No. of years
Assume you invested Rs. 1,00,000 for ten years and got a return of 12% then,
FV = 1,00,000 (1+12%)^10
FV = Rs. 3,10,585.
So, the value of Rs. 1,00,000 invested at 12% returns every year will stand at Rs. 3,10,585 in 10 years.
You can use the same formula to calculate the Compound Annual Growth Rate (CAGR). Suppose you invest Rs. 1,00,000 for ten years, and the FV becomes Rs. 3,10,585. Then, your CAGR stands at 12%.
2. Future Value using SIP Calculator
When you invest periodically over the long run, you calculate the returns using the Extended Internal Rate of Returns (XIRR), simply, a SIP calculator.
FV = P * [{(1+r)^n-1}/r] * (1+r)
Where,
FV = Future Value of Investments
P = Periodic SIP amount
R = Expected rate of return
N = No. of periodic investments
Even though the formula looks complicated, there are various calculators available online or even excel calculators which can give you results in less than a minute.
Investors can use these types of calculators to ensure they are investing the correct amounts over a period of time to achieve their financial freedom at the earliest.
Additionally, one can use these formulas in various ways. Suppose an investor needs a corpus of Rs. 1,00,00,000 in 20 years and expects 12% annual returns. Then, he can simply enter that figure in FV with other variables remaining constant and get the periodic investment amount.
Similarly, he can calculate the rate of returns, time period, etc., as per his investment goals.
