Investing is all about playing the numbers game and it can get quite tough to keep up with it after a point of time. This is where an investment calculator helps you out. It is a tool that enables you to get an idea about how your investments will perform in the coming years. It gives you a rough estimate about the returns you can expect from the securities that you have invested in. As a result, it helps you manage your portfolio accordingly to see if it meets your goals.
In this article, we will take you through the most important factors you need to know before using an investment calculator. Before that, let’s tell you about the importance of investment and why it is something that you should definitely do.
Why Should You Invest?
- To Build Long-term Wealth – One of the most important reasons why people make investments is to build long-term wealth. It is the safety net that you create to lead a happy life. Just imagine a situation where you feel like stopping your regular job and starting a business instead. You might not be able to do such a career switch if you have minimum funds to spare. However, if you have a strong investment portfolio, you can easily do so.
- Be Financially Stable After Retirement – One day you will like to retire and enjoy that time on your own terms. For this, you need to be financially independent to the point where you still have money without any job. Pension plans can be a good start, however, but the right investments in a big retirement portfolio can surely help you out more.
- Buy Expensive Commodities – Buying an expensive car or a house, or going on holidays frequently are some of the things that might not be possible with just your day job. To make such dreams a reality, you need more than one single source of income. This is where the returns you get from different investments come in handy. By having this side source of income, you can be financially more stable and enjoy the occasional splurge.
- To Tackle Inflation – Inflation is something we all have to deal with as time passes on, and the only way to tackle it is to invest your money in the right avenues. You should not just put your money in the bank and hope to keep it safe. You will need an investment that ensures the ROI is higher than the inflation for it to be useful. Investing your money in various long-term securities is the only way to do so.
Now that you know the importance of investing, you must be wondering about where to invest your funds. With so many options out there, one can easily get confused and this is where the investment calculator can help you out. Be it equities, shares, mutual funds, real estate, gold or any other security, you can use the investment calculator to get a rough idea of the returns you will get.
To use the calculator, you must have a clear idea about what the following terms are and how they are used -
- Starting Balance – This is the principal amount or the capital that you want to invest. It could be the money you have saved till now, the money you have inherited or the bonus you received from work. This amount basically provides a jump-start to your investing journey.
- Contributions – This is the amount you will likely add to the starting balance over time to grow the size of your investments. An avid investor may very well cut back on his/her lifestyle budget so as to have more money to invest. On the other hand, casual investors may not be that active in terms of making big contributions.
Another thing to note here is the frequency at which you make these contributions. While the majority of people do it annually, quite a few investors do it monthly and bi-weekly as well. Regular contributions will help your assets perform better in the long run.
- Rate of Return – End of the day, it is always about the returns you get from your investments. Therefore, the rate of return for each asset is important and it has to be included in the investment calculator. Here, make sure that you use a conservative number because you never know how volatile the market can be.
We can expect a 10-12% return on stocks and shares on a good day, but this rate can go really low if the market underperforms. This is the exact reason why you should diversify your investments so that you keep getting returns even if some of your assets are underperforming. Therefore, the safer option would be to choose 4% as your rate of returns while trying to estimate how much you stand to gain.
- Investment Time-frame – Lastly, you need to mention the time-frame that you are planning to stay invested in. The longer you stay invested, the better will be the impact of compounding. This is the reason why you should start investing at a young age.
A Brief Note on Total Returns vs Price Returns
SEBI (Securities and Exchange Board of India) asked mutual fund houses to calculate the returns by keeping the TRI (Total Returns Index) as the benchmark from February 1, 2018. This is different from the PRI (Price Returns Index), which was followed till now.
TRI includes both the dividend components and capital gains while calculating returns, so as to give you a clear idea of how the funds will perform. This is not the case when PRI is used as the benchmark, as it only takes the capital gains into account. SEBI introduced TRI to make the whole process more transparent for the investors.
So make sure that you put the rate of return according to TRI, while using it in the investment calculator.
In conclusion, you should always keep in mind that it’s important to make investments from a young age to be financially independent over the years. This not only allows you to make bold career choices but also enables you to achieve your financial goals.
To keep yourself on the right track, you should use investment calculators on a regular basis and check the value of your assets. Finally, with many investment calculators now made specifically for different securities, you should be able to get more accurate numbers, letting you plan each milestone more efficiently.