3 most Important formula’s you should know

8/2/2019 3 most Important formulas you should know

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3 most Important formula's you should know

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KEAT PRO XFRE,E I w it 1h O N L lN 'E T R A D IN G accountPowerfu'l tradilng & . t!ila,rling facility . ' , .3 most Important formula's you should knowSeptember 2, 2008 . 18 comments

1. Compound InterestT h i s f o rm u l a is o fte n u se d to c alc ula te t he r etu rn s s om e in ve stm e nt h as g iv en . T he rmin c on ce pt in c om po un d in te re st is th at in te re st g ets a cc um ula te d with t he t o ta l p r in c ipam ou nt a nd th at in te re st a ga in e ar ns in te re st o ve r th e y ea rs . W h ic h m ak es it v er y p ow er fu l .Formula: A =P * (1+r/t)"(nt)WhereP =principal amount (initial investment)r =annual interest rate (as a decimal)n =number of times the interest is compounded per yeart =number of yearsA =amount after time tExample 1 :Investment =Rs 10,000return =9%investment per iod =8 yearsTotal amount =10000(1+.09)"8 = 19925.63Example 2:Sensex re tu rned 17.3% r e tu rn over 29yrs since its i ncept ion i n 1979 . What w ould be w orth ofR s 10,000 in ve st ed th at tim e .A=10,000 * (1+.173)"29 =1022450.64 (10 lacs)Y ou c an se e th at a sm all a mo un t h as a ctu ally g ro wn to 100 tim e s .Compound i nt er e st Ca lcu la to r : http://matb.about.comllibrarylblcompotmdinterest.htm2.CAGRThis t oo l i s v e ry impor ta n t b ec au se it h elp s in c om pa ri ng tw o d itf er nt r etu rn s f rom tw o in ve stm en ts , y ou c an c alc ula te h ow r rr uc h a n in ve stm en t h as r etu rn ed p er y ea r o nc om po un de d b as is , I ts ju st th e o pp os ite o fC om po tm d in te re stFormula: CAGR=( A/P )lI n - Iwhere:A =Final amount
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3 most Important formula's you should knowP =amount investedn =Number of yearsCAGR c an b e a g re at to ol to c om pa re tw o d iffe re nt in ve stm ents and th er e r etu rn s .Example:A. 1 0,0 00 in ve ste d in a XYZ mu t u a l fimd fu r 2 y rs b ec am e 2 0,0 00B . 5 0,0 00 in ve ste d in G OL D fu r 7 y ea rs b ec am e 4 ,0 0,0 00Wh ic h i nv es tm ent h as g iv en mo re r et ur ns ?Her e th e m ain d ou bt is th at h ow to c alc ula te w hic h o ne is b ette r . . th e amo un t , te nu re i s d iff ere nt . So in this c as e we c al cu la te and see CAGR , one with m ore C AGR willb e g oo d.A ) C AG R =41.42 %B ) C AGR =34.59 %S o , in ve stm en t in A is be tt er t han B.WhichCAGR ca lcu la to r : htW://www.moneychimp.comicalculator/discol.Ul1: r a te ca lcu la to r .h im3. AnnuityThis furmula is v er y v er y im po rta nt o ne , in o ur d aily l ifu w e c om e a cross m an y situ atio n w he re w e d o a fix ed p ay me nt a t t he fixe d in te rv al, and w e w an t to c alc ulate th ereturns , but we dont know how to do it .. E xamp le c an b e

- Monthly payments inMutualfunds through SIP- Yearlypayment in a PPF .O r a ny in ve stm en t a t a f ix ed in te va l o ve r s om e y ea rs . Inth at c as e w e c alc ula te th e F in al value usi ng fu rmu la ca ll ed Amru it y .Formula: A =P * [{(I + i)" n - 1 }/i] * (1+ i) ( if pa ym en t a re b ein g m ad e a t th e s ta rt)(it will be P * [ {( J+ i)" n - 1 }/~ ifpayments are m ade at the end of the year)W he re :A =inal amountP =installment each timen =total number of installmentsi =interest ratefor that tenure (example if yearly return is 24%, but payments are made monthly then i =24112=2%)

Example 1 :R ob ert in ve sts 1 0, 00 0 e ac h m on th in a r rn rtu al fimd fu r 1 0 y ea rs a nd th e a nrru al r etu rn w as 1 8% , w ha t will be hi s f inal corpus ?Her e a s p ayme nts a re m on th ly , to ta l p ayme nt will be 10 * 12 = 12 0so n =12 0 and i=1 .5 % ( 18 /1 2)A = 10,000 * [{ (I + .0 15)" 1 20 - 1 }/.0 15 ] * ( 1 + .0 15 ) => 4 0,3 9.2 41 ( 40 la cs )Example 2:Vikas is planning his retirement, and p la nn in g to in ve st 5 ,0 00 p er m on th in a Mu tu al fimd fur 20 yrs w here he expects a return of 15% , then take out all t he amou nt a": -~yr s and t h e n pu t it ina F D for 15 yrs w hich gives him 9 .5% r et ur n.H ere , w e there are tw o p ar tsA. H e m ak es m on th ly pa ym ent fu r 20 yrs (h ere w e h av e to ap ply annuity)

D o y ou w ant to g et y our F ina nc ia l P la nn in g d on e? Click here toknow more)n)n =240 and i= 1 .2 5% ( as th e p ayme nt a re m on th ly )H is mon ey a fte r 2 0 y ea rs =[5,000 * (1 + .0125)"240 - 1) 1 .0125] * ( 1.0125) =7 5,8 0,0 00 ( 75 la cs )N ow he in ve sts this money into a FD fur 15 yrs at 9.5% .B ) F in al a rr ou nt =75,80,000 * ( 1. 09 5) " 1 5 =2 ,9 5, 00 ,0 00 ( 2.9 5 c ro re s OR 2 9.5 m illio ns )So his final corpus will be 2.95 crores .C alc ula to r: h ttp ://www.m on ey ch im p.c om ic alc ula to r/~ c alc ula to r.h im
http://htw//www.moneychimp.comicalculator/discol.Ul1:http://www.jagoinvestor.com/2008/09/3-most-important-formulas-you-should.htmlhttp://www.jagoinvestor.com/2008/09/3-most-important-formulas-you-should.htmlhttp://htw//www.moneychimp.comicalculator/discol.Ul1:


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/12 3 most Important formula's you should knowNote: You can alsofind some calculators at http://finance-and-investinr:.blor:spot.com/2008/05lcalculators.html

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3 most Important formula's you should knowc o Central Bank ofIndiac B Other:

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1nonym ous O ctober 6, 2009 at 1:35 pmCompou nd i nt er es t f urmu la is : A =P * ( 1 +r /n )A ( nt ) a nd n ot A =P * (1 +r/t)A(nt) .Typo?

2 . M anish C hauhan O ctober 6, 2009 at 2:33 pm@AnonyIlXJUsY up .. its a typo from my s id e . . t ha nk s f ur c or re ct in g itQ

.1 RahulFebruary 13, 2010 at 11:45 pmu su re u r a nn uity 1st e g is c or re ct ? ?imgetting amd 3 3. 6 l ac . . ??

4 K am al F ebruary 16, 2010 at 3:13 pm@ R a h u l ,Igree with you, it com es to -33.6 lacs.L oo ks lik e he h as m is se d to su bs tr ac t 1 f rom (1 +. 01 5) A1 20 , th at w ay it com es to -40.39 lacs.@manish,c an y ou p le as e c or re ct t he c al cu la ti on m is ta ke ifIm n ot w ro ng .

~M anishChauhanF ebruary 18, 2010 at 2:01 am@K am ala nd @Ra hu lY ou g uy s a re c or re ct. Im w ro ng @ .Iurg ot to su btrac t 1 iu ess ..Manish

.6 : Mahesh July 27,2010 at 7:58 pmF irst le t m e ap pre ciate yo ur h ard w ork . I am le arn in g lo t o f thing t hr ou gh y ou r b lo g wh ic h ih ou ld h av e le ar ne d v er y b ac k Gis th er e a ny f urmu la w he re w e c an c alc ula te r ate o f in tr es t f ur L IC p olic y?F or e g. S up po se iav 2 - 3 lic p olicy an d iwan t to c alc ula te w ha t r ate o f in tr es t im get tin g a ft er m a tu ri ty o f my policy?
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1a nish C hau ha n Ju ly 27 ,2 01 0 a t 9 :56 pmMaheshth an ks, F or re tu rn s fro mU C ,the re is n o spe cia l furm ula e sp ec ially fu r U C p olicie s, b ut there i s s om e th in g c all ed a s IRR an d XIRR, whic h is a g en er alc on ce pt w hic h y ou c an u se to c alc ula te L IC p olic ie s r etu rn s , htt;p://www.jagoinvestor.coml2009/08/what-is-irr-and-xirr-and-how-to.htmlManish

.8 . R aje shA ug ust 1 8,20 10 at 1 2:0 0 amFirst t h ings f ir st , AMAZ ING b lo g. K ud os .. . c am e to k now a lo t a bo ut fin an cia l p la no in g.A ls o y ou a ck nowle dg ed th e ty po in th e c om po un d in te re st f urmu la b ut did e dit y ou r b lo g e nt ry y et ?? ?

.2 Manish C hau ha n A ugu st 2 5,2 010 a t 8:16 p mRajesh

T he fu rm ula is c or rr ec t , Imad e a c alc ula tio n m is ta ke it se em s la st time @Manish

10 Balbir Septem ber 13, 2010 at 9:41 pmHiManish,J us t w on de rin g w he th er CAGR a nd 'a nn ua liz ed r etu rn ' a re s am e? K in dly c on firm QCAGR is in itia l an d f in al am ou nt, a nd y ea r d if fe re nc e b etw ee n th em We find th e c ompou nd ed a nn ua l r et ur n u si ng t ha t i ni tia l amou nt wh ic h b ec am e t he f in al amoun tover a period of time.I h av e se en 'a nn ua liz ed r etu rn ' te rm in Mutu al fimd pe rformance repo rt .Thank you,Balbir

11Man ish C ha uha n S ep te mb er 1 3, 2 010 a t 10 :1 5 pmBalbirY ea they are sam e . CA GR is a fancy nam e to scare people @

Manish

12 a no nym us Jan ua ry 16 , 2 01 2 at 1 1:0 7 p mCor re ct io n in S IP f urmu la :(10000*(((1 +180/0 /12)A(10* 12-1 ) /(180 /0/12) =3312881.91(5000*(((1 +150/0/12)A(20*12-1)/(150/0/12) =7486197.40
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IIManis h C hauh an J an ua ry 18, 2012 at 8:21 pmAnonymousT ha ts c orrec t. . bu t w hic h on e is wrong inthe arrticle ? I have as sumed th e p aymen ts m ad e inth e s ta rt o f th e mon th s a nd h en ce (1+r) is muhipl ied extraManish~

14 Sujithjohny January 31,2012 at 10:36 pmT his is r ea ll y h el pf ul f ur a s ala ry h ol de r l ik e m e .~

isManis h C hauh an F eb ru ar y 2, 2012 at 3:59 pmSl!iithG oo dto k now tha t !

lQ F re sh er Ma rc h 8,2012 at 12:20 pmExc el le nt b lo g, Mani sh . Mo st t op ic s are quite infurmative.L oo ks l ik e t he re is a m in or e rr or inth e Compound Int er es t formula. Shouldn't it be A=P * (1+r/n)"(nt)?

17 Manis h C ha uh an Mar ch 8,2012 at 4:05 pmY ea tha ts c orrec t . loo ks like Im ade a m istake .

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3 most Important formula’s you should know