The value of investments is only as much as their returns. So, it is critical to know how much your money is worth to plan your financial goals
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.
COMPOUND INTEREST: I want to take a loan of Rs 1 lakh to buy a used car. How much will the car cost me at an annual interest rate of 8 per cent for four 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 Rs 1 lakh is Rs 1,36,048.90. The total amount of interest charged for borrowing Rs 1 lakh is Rs 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 lumpsum investment (bank fixed deposits and National Savings Certificate, for example) over a fixed period at a certain rate of interest.
COMPOUND ANNUALISED GROWTH RATE : I had invested Rs 1 lakh in a mutual fund five years back at an NAV of Rs 20. Now the NAV is Rs 70. How should I calculate my returns on an annual basis?
Compound annualised growth rate (CAGR) will be used here to calculate the growth over a period of time. The gain of Rs 50 over five years on the initial NAV of Rs 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 annualised returns on a lumpsum investment in shares.
INTERNAL RATE OF RETURN : I paid Rs 18,572 every year on a money back insurance policy bought 20 years back. Every fifth year, I received Rs 40,000 back and Rs 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 Rs 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 Rs 40,000, type in Rs 21,428 (40,000-18,572) in every fifth cell. In the twentieth cell, type in –18572. In the twenty first cell, type in Rs 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.
A
-18572
-18572
-18572
-18572
21428
-18572
-18572
-18572
-18572
21428
-18572
-18572
-18572
-18572
21428
-18572
-18572
-18572
-18572
-18572
450000
5.28%
XIRR : I bought 500 shares on 1 January 2007 at Rs 220, 100 shares on 10 January at Rs 185 and 50 shares at Rs 165 on 18 May 2008. On 21 June 2008, I sold off all the 650 shares at Rs 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 4,25,750, type out
=XIRR (B1:B4,A1:A4) *100
Hit enter. The cell will show 122.95%, the total return on investment.
Also used for: Calculating MF returns, especially SIP, or that for unit-linked insurance plans.
A B
1-Jan-07 -110000
10-Jan-07 -18500
18-May-08 -8250
21-Jun-08 425750
122.95%
POST-TAX RETURN: My father wants a bank FD at 10 per cent return for five years. He pays 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 hit enter. 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, post-office time deposits, and Senior Citizens’ Savings Scheme.
PRE-TAX YIELD : My brother says that the investment in public provident fund (PPF), which gives 8 per cent, is the best. Isn’t 8 per cent a low rate of return?
An 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 compared with returns of a taxable income to estimate its worth. For someone paying a tax of 30.9 per cent, the pre-tax yield in PPF is 11.57 per cent. At present, there is no fixed, safe and assured-return option that has 11.57 per cent return and a post-tax return comparable to PPF’s 8 per cent.
Formula: Pre-tax yield = ROI / (100-TR)*100
Type in: =8/(100-30.9) *100 and hit enter. 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.
INFLATION: My family’s monthly expense is Rs 50,000. At an inflation rate of 5 per cent, 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
Type in: =50000*(1+5% or .05)^20 and hit enter. You will get Rs 1,32,664 as the answer, which is the required amount.
Also used for: Calculating maturity value on an investment.
PURCHASING POWER: My family’s monthly expense is Rs 50,000. At an inflation rate of 5 per cent, how much will be the purchasing value of that amount after 20 years?
Inflation 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 per cent 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 hit enter. You will get Rs 18,844, which is the reduced amount.
REAL RATE OF RETURN: My father 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).
DOUBLING, TRIPLING OF MONEY: I can get 12 per cent return on my equity investments. In how many years can I double or even triple my money?
Formula: No. of years to double = 72/expected return Type in: =72/12 and hit enter. You will get 6 years. For tripling, type in: =114/12 and hit enter. You will get 9.5 years. For quadrupling, type in: =144/12 and hit enter to get 12 years.
*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*- TAX STRUCTURE IN INDIA
Qus. : What are you doing?
Ans.: Business.
Tax: PAY PROFESSIONAL TAX!
Qus. : What are you doing in Business?
Ans.: Selling the Goods.
Tax: PAY SALES TAX!!
Qus. : From where are you getting Goods?
Ans.: From other State/Abroad
Tax: PAY CENTRAL SALES TAX, CUSTOM DUTY OCTROI!
Qus. : What are you getting in Selling Goods?
Ans.: Profit.
Tax: PAY INCOME TAX!
Qus. : Where you Manufacturing the Goods?
Ans.: Factory.
Tax: PAY EXCISE DUTY!
Qus. : Do you have Office / Warehouse/ Factory?
Ans.: Yes
Tax: PAY MUNICIPAL FIRE TAX!
Qus. : Do you have Staff?
Ans.: Yes
Tax: PAY STAFF PROFESSIONAL TAX!
Qus. : Doing business in Millions?
Ans.: Yes
Tax: PAY TURNOVER TAX!
Qus. : Are you taking out over 25,000 Cash from Bank?
Ans.: Yes, for Salary.
Tax: PAY CASH HANDLING TAX!
Qus. : Where are you taking your client for Lunch Dinner?
Ans.: Hotel
Tax: PAY FOOD ENTERTAINMENT TAX!
Qus. : Are you going Out of Station for Business?
Ans.: Yes
Tax: PAY FRINGE BENEFIT TAX!
Qus. : Have you taken or given any Service/s?
Ans.: Yes
Tax : PAY SERVICE TAX!
Qus. : How come you got such a Big Amount?
Ans.: Gift on birthday.
Tax: PAY GIFT TAX!
Qus. : Do you have any Wealth?
Ans.: Yes
Tax: PAY WEALTH TAX!
Qus. : To reduce Tension, for entertainment, where are you going?
Ans.: Cinema or Resort.
Tax: PAY ENTERTAINMENT TAX!
Qus. : Have you purchased House?
Ans.: Yes
Tax : PAY STAMP DUTY REGISTRATION FEE !
Qus. : How you Travel?
Ans.: Bus
Tax: PAY SURCHARGE!
Qus. : Any Additional Tax?
Ans.: Yes
Tax: PAY EDUCATIONAL, ADDITIONAL EDUCATIONAL SURCHARGE ON ALL THE CENTRAL GOVT.'s TAX !!!
Qus. : Delayed any time Paying Any Tax?
Ans.: Yes
Tax: PAY INTEREST PENALTY
This picture is a beautiful portrait of two lovers, Reshma and Shera. Just like many other love stories, these two young people were madly in love but yet the circumstances and time compelled both to keep their love a secret and live a life of misery without each other. When their families, who were in the midst of a violent feudal conflict, found out about their relationship the situation for both of these star-crossed lovers got even worse. Shera committed suicide and leaving Reshma behind with nothing to live for, therefore she had no choice but to follow in the footsteps of Shera to be together at least after they die. Though they both didn't get married and lived happily ever after, they still managed to demonstrate the strength and commitment a relationship needs to last.
The second picture, Beauty Awaiting her Shepherd Lover, is also a picture of two lovers waiting to unite. The woman is daydreaming about her husband coming back to see her. Often, in India after women get married, their husbands leave to other cities and towns to make money. The couple might not even get to spend any time together after their marriage before the husband has to find work. I have grown up watching many ladies in villages waiting for their husbands to return from other cities, long trips in search or work, or from other countries. Even though I couldn't find the history behind this picture, I was still able to analyze the picture historically because of my knowledge about the Indian culture. She is wearing a red bindi ("A decorative mark worn in the middle of the forehead by Indian women,") which means that she is married and the fact that his turban is also red means that they must have gotten married recently.
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