Important Financial Calculation to Managing Investment

Managing money can involve calculations to understand the worth of an

investment. To arrive at a result, calculations can be done in a different way or by
using a different formula.
Even the same formula can be used differently to arrive at a certain result. Here are
a few commonly used money management formulas. Use an excel sheet to do
these.
1. Doubling, Tripling & quadrupling of Money
I can get 12 % return on my equity investments. In how many years can I double or
even triple & quadrupling my moneyFormula: No. of years to
Double the money = 72/expected return (72/12 and you will get 6 years.
For tripling the money =114/12 you will get 9.5 years.
For quadrupling the money=144/12 you will get 12 years.
2. Compound Interest
I want to take a loan of INR 1 lakh to buy a used car. How much the car will cost me
at an annual interest rate of 8 % for 4 years-?
The compound interest formula can be used here to calculate the final cost, which
would include the loan amount and the interest paid? The amount that is actually
paid for INR 1 lakh is INR 136,048.90. The total amount of interest charged for
borrowing INR 1 lakh is INR 36,048.90.
Formula: Future value = P (1 + R) ^N
Type in: =100000(1+8%) ^4 and hit enter. P: amount borrowed; R: rate of interest;
N: time in years.
Also used for: Calculating the maturity value on lump sum investment (bank fixed
deposits and National Savings Certificate, for example) over a fixed period at a
certain rate of interest.
3. Compound Annualized Growth Rate
I had invested INR 1 lakh in a mutual fund five years back at an NAV of INR 20. Now
the NAV is INR 70. How should I calculate my returns on an annual basis-?
Compound annualized growth rate (CAGR) will be used here to calculate the growth
over a period of time?

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The gain of INR 50 over five years on the initial NAV of INR 20 is a simple return of
250 per cent (50/20 * 100). However, it should not be construed as 50 per cent
average return over five years.
Formula: CAGR = {[(M/I)^(1/N)] - 1} * 100
Type in: =(((70/20)^(1/5))-1)*100 and hit enter. M: maturity value; I: initial value; N:
time in years. CAGR here is 28.47%.
Also used for: Calculating the annualized returns on a lump sum investment in
shares.
4. Internal Rate of Return
I paid INR 18,572 every year on a money back insurance policy bought 20 years
back. Every fifth year, I received INR 40,000 back and INR 4.5 lakh on maturity.
What was my rate of return-?
The internal rate of return (IRR) has to be calculated here. It is the interest rate
accrued on an investment that has outflows and inflows at the same regular
periods.
In the excel page type INR 18,572 as a negative figure (-18572), as it is an outflow,
in the first cell. Paste the same figure till the twentieth cell.
Then, as every fifth year has an inflow of INR 40,000, type in INR 21,428 (40,00018,572) in every fifth cell. In the twentieth cell, type in -18572. In the twenty first
cell, type in INR 4,50,000, which is the maturity value of the policy.
Then click on the cell below it and type: = IRR(A1:A21) and hit enter.
5.28% will show in the cell. This is your internal rate of return.
Also used for: Calculating returns on insurance endowment policies.

5. XIRR
I bought 500 shares on 1 January 2014 at INR 220, 100 shares on 10 January at INR
185 and 50 shares at INR 165 on 18 May 2014. On 21 June 2015, I sold off all the
650 shares at INR 655. What is the return on my investment-?
XIRR is used to determine the IRR when the outflows and inflows are at different
periods. Calculation is similar to IRR's. Transaction date is mentioned on the left of
the transaction.
In an excel sheet type out the data from the top most cell as shown here. Outflows
figures are in negative and inflows in positive. In the cell below with the figure
425,750/XIRR (B1:B4,A1:A4)*100 (The cell will show 122.95%, the total return on investment.

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Also used for: Calculating MF returns, especially SIP, or that for unit-linked insurance
plans.

6. Post-Tax Return
I want a bank FD at 10% return for 5 years. I pay income tax. What will be the
returns-?
The post-tax return has to be calculated here? The idea is to know the final returns
on a fully taxable income. Interest income from the bank is taxed as per your tax
slab.
Formula: ROI - (ROI * TR) =Post-tax return
Type in: =10 - (10 * 30.9%) and you will get 6.91%
ROI: rate of interest; TR: tax rate (depends on tax slab)
Also used for: Calculating post-tax returns of national savings certificates, postoffice time deposits, and Senior Citizens' Savings Scheme.

7. Pre-Tax Yield
My brother says that the investment in public provident fund (PPF), which gives 8%,
is the best. Isn't 8 per cent a low rate of returnAn investment's pre-tax yield tells us if its return is high or low. The return on PPF (8
per cent) is tax-free. Also, this has to compare with returns of a taxable income to
estimate its worth. For someone paying a tax of 30.9 %, the pre-tax yield in PPF is
11.57 %. At present, there is no fixed, safe and assured-return option that has 11.57
% and a post-tax return comparable to PPF's 8%.
Formula: Pre-tax yield = ROI / (100-TR)*100
Type in: =8/(100-30.9)*100 and you will get 11.57%. ROI: rate of interest, TR: tax
rate, (depends on tax slab)
Also used for: Calculating the yield on an Employees' Provident Fund or any other
tax-free instrument.
8. Inflation
My monthly expense is INR 50,000. At an inflation rate of 5%, how much will I need
20 years hence with the same expenses-?
The required amount can be calculated using the standard future value formula?
Inflation means that over a period of time, you need more money to fund the same
expense.
Formula: Required amt. =Present amt. *(1+inflation) ^no. of years
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Type in: =50000*(1+5% or .05) ^20 and you will get Rs 1, 32,664 as the answer,
which is the required amount.
Also used for: Calculating maturity value on an investment.

9. Purchasing Power
My family's monthly expense is Rs 50,000. At an inflation rate of 5 %, how much
will be the purchasing value of that amount after 20 yearsInflation increases the amount you need to spend to fetch the same article and in a
way reduces the purchasing power of the rupee. Here, Rs 50,000 after 20 years at
an inflation of 5% will be able to buy goods worth Rs 18,844 only.
Formula: Reduced amt. = Present amt. / (1 + inflation) ^no. of yrs.
Type in: =50000/ (1+5%) ^20 and you will get Rs 18,844, which is the reduced
amount.
10.

Real Rate of Return

I wants to make a one-year bank FD at 9 per cent. On maturity, he says, the capital
will be preserved and he would get assured return on it.
It is true that fixed deposit is safe and gives assured returns. However, after
adjusting for inflation, the real rate of return can be negative.
Formula: Real rate of return= [(1+ROR)/ (1+i)-1]*100
Type in: = ((1+9%)/ (1+11%)-1)*100 and hit enter. -1.8% is the real rate of return.
ROR: Rate of return per annum; i: rate of inflation (11 per cent here).

Pjsurjit (surjitpj@gmail.com)