Some Important Formula's in Personal Finance

 1. Compound Interest : 2. Annuity 3. CAGR

Manish Chauhanhttp://www.jagoinvestor.com

Compound Interest     

This formula is used to calculate future value of One time payment today after some years .

Future Value = Present Value * (1 + rate)^Tenure

Rate = Expected rate of Return

Tenure = Number of years

Example 1 (Compound Interest)

I want to invest Rs 50,000 in a Fixed Deposit for 5 yrs at  8% rate of return . How much will be the maturity value 

Future Value = 50,000 * (1 + .08) ^ 5

= 73466 

Example 2 (Compound Interest)

I want to invest Rs 10,000 in a mutual fund today , How much will it become after 10 yrs , considering the rate of return of 15% .  Future Value = 10,000 * (1 + .15) ^ 10 = 40455

Annuity 

This formula is used to calculate the future value when we do investment on a regular basis after a fixed interval .    Example

- when we invest in a mutual fund per month through SIP .- When we put money in our PPF account each year . 

Formula

Future value= Amount per installment * (1+r) * [(1+r) ^n  - 1]/ r 

Example 1 (Annuity)

I want to invest Rs 50,000 in a my PPF account per year for next 15 yrs , How much will it become after 15 yrs , at 8% .  Future Value = 50,000 * (1.08) * (1.08 ^ 15  - 1)/.08

= 14,66,214

Example 2 (Annuity)

I want to invest Rs 1,000 in a mutual fund per month for next 10 yrs , How much will it become after 10 yrs , considering the rate of return of 12% .  r = rate of return = 12/12 = 1% (per month) n = number of payments = 12 * 10 = 120 Future Value = 1,000 * (1.01) * (1.01 ^ 120  - 1)/.01 

= 232339

CAGR : Compounded annual Growth Rate

- Used to calculate the annual Return provided by an Investment .- Tool to compare investments - Opposite of Compound Interest

Formula 

CAGR = nth root of [(Current Value / Original Investment) -1 

n = tenure nth root = to the power 1/n

 

Example 1 (CAGR)

I Invested Rs 50,000 in a mutual fund on June 2005 , Its value after 4 yrs is Rs 1,00,000 . What is the annual returns it has provided to me ? 

CAGR = [(100000 /50000)^ (1/4)   - 1 ]

= 2 ^ .25   - 1= .1892 

= 18.92% Annual return

Example 2 (CAGR)

Which investment is Better ?  Investment 1 : 50,000 invested in 2000 became 2,00,000 in 2009 Investment 2 : 10,000 invested in 2004 became 25,000 in 2008

CAGR for Investment 1 = [200000/50000]^(1/9) - 1= 16.65 %  CAGR for Investment 2 = [25000/10000] ^ (1/4) - 1= 25.74%  Hence , Investment 2 is better than Investment 1 .      

 

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