An investment calculator is a financial tool that helps individuals to plan their finances and set specific goals. Such a tool is used to compute different parameters to build an investment plan as per one’s needs and requirements.
An investment calculator can assist a person to ascertain the estimated time span of his or her investment money. Individuals can also assess how much money would be worth investing in a given investment instrument and for how long. So, whether you’re just starting or have been investing for a while, an investment calculator is the ultimate financial tool that can help you figure out how to reach your goals.
On that note, let us proceed to learn more about an investment calculator and its characteristics.
What are the Variables Involved in an Investment Calculator?
These crucial elements make up an investment and they are also the variables involved in an investment calculator.
Expressed as a percentage, the rate of return offers an idea of the estimated earnings on your investment. The rate of return helps to compare the attractiveness of different investment instruments. The idea is to opt for an investment instrument that will help beat inflation and average out the losses incurred on the course.
2. Starting amount
This is the principal amount with which one intends to start an investment. Typically, the sum of the principal amount depends on the investor’s goals and financial standing. Individuals should pick this amount based on their financial standing so that they don’t strain their finances after making monthly/quarterly/half-yearly/yearly investments.
3. End amount
This denotes the estimated maturity amount that one is likely to receive at the end of their investment period. The end could be heavily influenced by the rate of return, frequency of investment, investment period, and market factors such as volatility and inflation.
4. Investment length
It is the tenure throughout which the parked sum of money remains invested. Depending on one’s goals, individuals choose to park their money for a long or short tenure. Some individuals also prefer to park their money for a longer period to spread out the market risk when investing in stocks or other market instruments with high-risk components. Others also like to stay invested to avail of the benefits of compounding interest.
5. Additional contribution
This is known as an annuity payment. Typically, any additional contributions made during the active tenure of an investment will lead to better returns and a higher maturity value. Investors can take advantage of a sudden influx of cash or bonus and invest the amount to strengthen their investments.
Now that we know about the variables of the investment calculator let’s check out how to use the financial tool to align investments.
Steps to Use an Investment Calculator
Investment calculators are designed to offer quick and accurate results and can be accessed easily. The design is user-friendly so that anyone can use it without much hassle.
One can easily access an investment calculator to plan their finances in these easy steps.
Step 1: Open an online investment calculator
Step 2: Enter the initial investment amount you wish you invest
Step 3: Enter an investment tenure that matches your goals and risk-taking capacity
Step 4: Enter the expected rate of return (as offered by an investment option or accompanying it)
Step 5: Chose the investment frequency, i.e., how frequently you wish the returns on your investment to compound
For instance, if you wish to make additional contributions monthly then opt for the monthly compounding option. If you plan to make annual or half-yearly contributions then opt for annual or half-yearly contributions, respectively. Notably, if the returns are compounded at frequent intervals it will ensure higher growth.
Once you have entered these variables you will be able to arrive at the estimated maturity value. In case a certain combination of variables does not give you the desired results that match your investment goals, you may readjust the variables. Since the investment calculator allows multiple adjustments you can realign your variables to arrive at the desired results.
This will help understand which combination works for you the best and which will help you ace your long-term goals.
However, before using a financial calculator it is recommended to know your goals and how amount you would need to ace them. Once you have an idea about the same, you use the investment planning tool to understand which estimated maturity amount would be enough to scale them with ease. Besides these, it is also important to be aware of the current market situations and prices of investment instruments to make an informed investment choice. For instance, stocks and gold price in India tend to fluctuate a lot. Individuals need to keep track of the same to decide the best time to invest and sale the same in the market. However, the decision should also be based on extensive research, market temperament, and personal goals.
Returns and Risk Components in Investment
Now that we have discussed the variables of an investment calculator let us now focus our attention on the risk and returns aspect of investment. Typically, the closer an individual gets to their retirement age the more vulnerable and risk-averse they become as an investor.
This is why, many seasoned investors tend to shift their investment from stocks to debt instruments as they grow closer to their retirement to cushion against market volatility. They also tend to invest in options that help generate a stream of steady income.
Notably, in investment, there is a close connection between risk and reward. Typically investment instruments such as equity stocks are known to generate high returns that help beat inflation. However, they are also exposed to greater market risks.
This is why it is crucial that intending investors find out about their risk tolerance capacity and then decide which investment avenue is more suited for them. By doing so they will be able to generate returns, and build a corpus overtime to meet financial goals while spreading over the risk of investment through the tenure. Notably, in all these steps an ideal investment calculator will come in handy and help plan the entire process better.