Plan your investments with the help of Financial Calculators

Published On: 02-Jul-2021

When it comes to financial planning, certainly there are many questions in the minds of investors. Some may want to know the future value on their consistent savings/investments; some may like to know the actual returns earned from their past savings/investments; some may like to know the investment required to reach a specific financial goals which is in their mind. One can make use of different financial calculators to plan their investments. 

Here are the three basic financial formulas to make investment decisions:

1. Future Value of Lumpsum Investment

The future value on Investment is calculated as below:

FV = PV (1+r%)^n,

Where FV = Future Value

PV = Investment Amount

               r = Projected annualized return

               n = No. of years

For example, one has invested Rs. 1 lakh and wishes to estimate the investment's future value after 20 years with estimated annual returns of 10% per annum. The calculation will be done as below:

FV = 100000 X (1+10%)^20 = Rs. 6,72,750

2. Future Value of Investments through Systematic Investment Plan (SIP)

When one makes regular savings through SIP, each investment's projected value can be derived by calculating each SIP instalment's future value considered a separate investment. However, the calculations can also be simplified if the SIP instalment amount is consistent across the period. The calculation can be done as below:

Future Value of SIP, FV = P * [{(1+r)^n-1}/r] * (1+r),

where P = Monthly SIP Instalment

               r = Annual Returns

               n = No. of months of SIP instalments

For example, an investor has registered a monthly SIP of Rs. 10,000 for 20 years with expected returns of 10% per annum. The future value of the corpus will be calculated as below:

FV = 10,000 * (((1+(10/12))^(1/12)-1,(20*12) /(10/12)] * (1+(10/12)) = Rs. 72,39,867

The investors can also use the financial calculator to calculate the monthly savings required to achieve the financial goals by using the Goal Seek calculator. The function works to derive the desired result with a change in one formula or table variables. When aiming to calculate the desired investment amount, one can set the Future Value as the amount of financial goal and set the variable figure for the Cell wherein the investment amount has been mentioned. 

For example, in the illustration of SIP above, the corpus amount of Rs. 72.40 lakh has been derived. However, the investor needs to accumulate Rs. 1.25 crores by the end of 20 years. In such a case, by making calculations as described above, the figure of Rs. 17,300 is derived. As such, one must invest Rs. 17,300 monthly for 20 years to arrive at a projected corpus amount of Rs. 1.25 crores with assumed rate of returns of 10% per annum. 

3. Calculating the Returns on the Investment Portfolio

The returns from an investment portfolio can be calculated through the XIRR formula. This formula takes care of the investments undertaken at different dates/ periodicities and different amounts. As such, the investors can use this function even if they have increased the SIP instalment through SIP top-up or paused the SIP temporarily due to any reason. 

To calculate XIRR, one needs to plot the data for different cash flows on the respective dates and adding the last row with the portfolio valuation as the cash inflow, assuming that the portfolio is redeemed on the same date. While plotting the data, all the cash outflows, i.e., SIP instalments, are mentioned as negative amounts, while the redemption amount is entered as a positive amount. The formula used for XIRR calculation is as below:

=XIRR (values, dates, guess), 

wherein values represent the data range for cash flows, dates present the data range for investment dates, and guess is an optional parameter for the expected IRR estimate and can be left blank. 

While this function helps review the portfolio performance, the investors must also note that mutual fund schemes' historical performance is not a guarantee of future returns, and such performance may or may not be sustained in the future.

With the use of mathematical expressions as above, investors can make informed and sound investment decisions. As such, such financial calculators can help investors stay on track with their investment journey.

Disclaimers:

UTI AMC Ltd is not an investment adviser, and is not purporting to provide you with investment, legal or tax advice. UTI AMC Ltd or UTI Mutual Fund (acting through UTI Trustee Company Pvt. Ltd) accepts no liability and will not be liable for any loss or damage arising directly or indirectly (including special, incidental or consequential loss or damage) from your use of this document, howsoever arising, and including any loss, damage or expense arising from, but not limited to, any defect, error, imperfection, fault, mistake or inaccuracy with this document, its contents or associated services, or due to any unavailability of the document or any part thereof or any contents or associated services.

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This material is part of Investor Education and awareness initiative of UTI Mutual Fund.

The information herein should not be considered as 'investment advice'. Reader is requested to make informed investment decisions and consult their Mutual fund distributor or financial advisors to determine the financial implications with respect to investing in Mutual Funds

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The information in this document pertaining to financial calculators or assumption on investment returns is provided for information purposes only. Users of this document should seek advice regarding the appropriateness of investing in any securities, financial instruments or investment strategies referred to on this document and should understand that statements regarding future prospects may not be realized.  The recipient of this material is solely responsible for any action taken based on this material. Opinions, projections and estimates are subject to change without notice.