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Updated date : 23 April 2019
Financial Planning Calculator
An investment calculator helps an individual to determine the approximate period of his/her investment savings. One can also determine the amount of savings that can be worth investing and the time period it might last.
So, whether one has started investing or he/she is investing for some time, an investment calculator can help one to find out how to meet with his/her goals. Most of the calculators show how one’s initial investment was, the frequency of an individual’s contributions, and his/her risk tolerance. These factors affect the growth of one’s money through investment.
Variables Involved in Investment Calculator
For any financial investment that one makes, there are four variables that play a major role in making up the investment, these variables are:
- Starting or Initial Amount: This amount is also known as the principal amount, and is apparent at the time of the start of the investment. In typical terms of investment, the starting or initial amount of investment can be a large amount that one has saved for his/her home or got as an inheritance, or purchase price of a good quantity of gold.
- Rate of Return: The return rate is that variable of the investment calculator that matters the most to the investors. Seeing from outside, it may appear as a simple percentage, but it is a hard, cold number that is used to compare the attractiveness of different types of investment options.
- Length of Investment: The length of the investment is another factor that plays a major role in the investment calculator. On one hand where longer investment means more risks to it because of the unforeseen future. The other hand, more periods of investment increases the compounding of the returns and hence greater rewards are generated.
- End Amount: The desired or required amount that an investor wants at the end of the investment lifecycle.
- Additional Contribution: This is also known as annuity payment in financial terms; however an investment can be done without this feature. However, all the other contributions during the lifetime of investment towards the principal amount may result in higher resulting amount and more accumulated return.
What Does Investing Do?
Investing enables an individual to take money that he/she is not spending and keep it in a place where it can work for him/her. In layman's terms setting aside some money out of income to get money from it in the future is termed as an investment. If an individual is a conservative investor, he/she may invest in fixed income opportunities like fixed deposits. The principal amount that one invests remains safe and the investor gets interested in this amount. However, if an individual is an aggressive investor, he/she can invest in equity. In equity investment higher returns are gained but at the cost of higher risk.
Types of Investments
Below mentioned are different types of investments plans that can be used in an investment calculator to calculate the investment:
- Bonds: When one is making an investment, risk becomes the key factor, however with this type of investment premiums are paid for greater risks. In this type of investment, an investor loans some amount to the issuer when the investor acquires the bond. The loan issuer repays the money over a period of time with a fixed interest rate.
- Fixed Deposit in Bank: A fixed deposit (FD) in the bank is another investment type that is popular among people with low-risk appetite.
- Public Provident Fund: Another good option to invest in is the Public Provident Fund. Under this investment type, the investor gets tax benefits under Section 80C of the Income Tax Act. Moreover, the interest that one earns from this and the maturity gained get tax exemption.
- Fixed Maturity Plans: These are the close-ended debt funds that are offered by the mutual funds. As the name of these funds says, they have fixed maturity date.
- Debt Mutual Funds: The debt mutual funds are open-ended mutual funds that are considered less volatile if we compare them with equity. Moreover, these funds offer stable returns as well.
- Stocks or Direct Equity: This is another popular type of investment which is not fixed-interest investments, but they are considered as one of the most important forms of investment for both individual investors and institutions. Herein, an investor gets a percentage or share of ownership of an organization and the company then promises to share its profits with its investors.
- Equity Oriented Mutual Fund Scheme: As per the name of this investment, these are the schemes that invest at least 65% of the corpus of the stock in domestic organizations.
- National Pension Scheme (NPS): The investors who want to safeguard their post-retirement life can invest in pension plan named as National Pension Scheme.
- Commodities: The commodities can range from valuable metals such as silver and gold to commodities of day to day use such as gas and oil. If one has invested his/her money in gold, he/she can use gold in the situation of various financial insecurities.
- Real Estate: Investing in real estate is another good way to invest money. People purchase a house to self-occupy or to get rental income from it or to get capital gains. One can also purchase land and make it more valuable with improvements.
Returns and Risks in Investment
As a part of the investment calculator, the one factor that matters is risks and returns. The closer one gets to the retirement, the more vulnerable he/she becomes an investor. Various financial advisors suggest old investors, who are getting closer to retirement, to reduce their exposure to risk by shifting their investments from stocks or equity to bonds. Basically, in investment, there is generally a trade-off between return and risk. The investors who have a higher potential for risk also have higher potential for risks. Most of the times, sound and safe investment options very rarely beat inflation. However, searching for the asset allocation balance that is most appropriate for one, he/she has to consider his/her risk tolerance capacity and age as well.
How Does An Investment Calculator Work?
One can very easily calculate his/her investment returns through an online investment calculator with high accuracy. Most of the investment calculators have two options:
- Yearly investment calculation
- Monthly investment calculation
The steps to calculate the investment returns through an investment calculator are:
- Step 1: One has to fill the initial amount that he/she wants to invest every year.
- Step 2: After this, one has to fill the rate of return that he/she wants to get. A conservative investor may want 8 to 9% of the return. However, an aggressive investor may fill 11 to 12% investment return.
- Step 3: The next step that one has to follow is to select the period in years for which one wants to stay invested.
- Step 4: The last step is to select any current investment that one is holding.
Most of the investment calculators have these fields, filling which will provide the future value of the investment. Generally, a calculator also shows the total investment that one has made and the total amount to which the money invested has grown.
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