5 Basic Formulas for Investment - Beginners
5 Basic Formulas for Investment - Beginners
Whether you are investing in a Stock(Share) or a Mutual Funds Scheme, there are certain formulas are applicable to all types of Investment avenues. Most importantly, these formulas will help those who are putting their money in Banks and Post Office Savings.
Learning about a Mathematical Formula in our school days can be exhausting and a bored one for the most. But in the time of making money, we have the opportunity to learn the art of Making Money with Investing and Savings.
A lot of people may not like the word, ' Money '. They may lie to hide their Financial Status. It's their Personal Obligation related to Money. But everyone likes to Counting Money, Spending More Money and Investing it to make Double, Triple, Quadruple, etc. So, it makes them lot of happy while doing this. I am not just saying these words, but the World Economy says.
There are 5 Basic Mathematical Formulas especially for the Investment Area and it is just for the Beginners. Those who have not yet learned, can make of use this.
- Absolute Returns and Inflation Adjusted Returns
- CAGR
- Double your Money
- Triple your Money (Investment)
- EMI Formula (Loan)
Absolute Returns and Inflation Adjusted Returns:
I have already elaborated this in my earlier post - Adjusted Returns on Investment
The Absolute Return is nothing but, it is a simple return which an investment earns a return over a certain period of time. It would be shown as a Percentage. The investment can be anything like Bank Deposits, Mutual Funds, Stocks, Real Estate Property or Gold.
Absolute Return = (ROI / OI) X 100
ROI - Return on Investment
OI - Original Investment
If you are investing in a Particular Mutual Fund Scheme with a Lumpsum amount of Rs. 1,00,000 and it becomes the value of Rs. 1,22,000 after a certain period of Time - Now, the Return on Investment (Profit) is Rs. 22,000 /-
The Absolute Return as per the above Formula, (22,000 / 1,00,000) X 100 = 22 Percent.
Annualized Return:
The Measure of Return on Investment(ROI) in which the return is calculated as a Percentage Per annum (p.a).
(ROI / OI) X 100 X (1 / Holding period of investment in years)
We can take the same numbers as you are invested a lump sum amount of Rs. 1 Lakh in a 1 Year Fixed Deposit in a bank and the maturity amount of Rs. 1,07,185 (Quarterly Compounded). Now the ROI is Rs. 7,185.
Annualized Return is: 7185 / 1 Lakh X 100 X 1 / 1 = 7.185 Percent.
If you are holding this investment for 3 years and the Final investment value is Rs. 1,23,500 /- Then the ROI is Rs. 23,500 /-
Now, the Annualized return is: 23500 / 1 Lakh X 100 X 1 / 3 = 7.83 Percent.
It is noteworthy that you can also calculate for the number of days or number of months.
365 / Number of days the investment held - (ROI / OI) X 100 X (365 / No. of days)
12 / Number of months the investment held - (ROI / OI) X 100 X (12 / No. of months)
This can be useful for the Mutual Funds and Stock holding period.
For Inflation Adjusted Returns - Read on...
CAGR Returns:
For the CAGR Returns, the Power of Compounding matters. As the time takes, the investment will grow better.
CAGR = (Ending Value / Beginning Value) ^ (1 / No. of years) - 1 X 100
For example, you are invested in a Stock 'A' with an amount of Rs. 1,00,000 which the stock priced Rs. 100 per Share in the month of January 2015. At the end of January 2020, the Stock was traded at Rs. 200 per Share.
What is the CAGR of your Investment at the end of Jan, 2020 ?
(200/100) ^ (1/5) - 1 X 100 = 14.87 Percent
For Months - 12 / No. of Months
For Days - 365 / No. of Days
CAGR is generally used to calculate the returns based on Annually Compounded, where the investment has been Compounding over the time Period. So, it will calculate with the reinvested interest also.
Double your Investment (Money):
There is a Simple Rule called, ' Rule No. 72 ' which helps you to know that when your invested money will get doubled. For this, one needs the Rate of Return and Capital or Invested amount.
Rule 72 = 72 / Rate of Return
For example, if you are investing a lump sum amount of Rs. 1,00,000 /- in a Fixed Deposit with a rate of interest is said to be 8 Percent. Then, your investment will be double in,
72 / 8 = 9 Years.
So, the lump sum amount of Rs. 1 Lakh would be get doubled (Rs. 2 Lakh) in 9 Years, if the Interest rate is 8 Percent.
Triple your Money:
The Rule of 115 = 115 / Rate of Return
For Triple your investment or Money, you can use the above formula to make it real...
We can take the same example - If you are investing an amount of Rs. 1 Lakh in a Particular Instrument with a Rate of Return is about 12 Percent. Then, your money will get Triple in,
115 / 12 = 9.6 Years ( It takes around 9 Years and 6 or 7 Months)
So, the Concept of Doubling and Tripling just tells that the Rate of return is important for any investment - Lower the rate, Higher the Years.
Loan EMI Formula:
One of the most important formula for the Borrower (Spending) and utter trash for the Debt Free Investor (Savings & Investing) :)
But, it needs for a Housing Loan and Business.
EMI = [P * r * (1+r)^N] / [(1+r)^N-1]
EMI - Equated Monthly Installment
P - Principal Amount
r - Rate of Interest per month
N - Number of Installment period
For the Rate of Interest, you have to calculate this from year to month.
Example, If you are taking a loan Principal of Rs. 30 Lakh, the interest rate is 9 Percent p.a and the tenure is 20 Years. Then the Loan EMI amount is,
EMI = [ 30,00,000 X 0.0075 X (1 + 0.0075)^240] / [(1+0.0075)^240-1]
= [135205.9093] / [5.0091]
= Rs. 26,992.05 / - (EMI)
Using the Calculator or Excel - Spreadsheet is very easy everywhere, but using the Formula with your brain is Superb (Still you need calculator for the above numbers) :)
Kindly share your views / comments with a smile :)
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