Future Investment Value and How to Calculate Them: A Detailed Guide
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Calculating the future value of your current investment is a fundamental component when creating any financial strategy. Through such calculations, you can get an understanding of the trajectory your investment will take in the future. Moreover, you can also determine the approximate value of your current savings with a future value calculator.
You must realise that your investments need to beat inflation in order to be profitable to you in the long run. Hence, since calculating the future value of your current savings and investments can help you earn returns above inflation, learning all about this calculator is a prerequisite.
What is a Future Value Calculator?
The future value calculator, much like a fixed deposit interest calculator, is a tool that you can find online. This tool helps you estimate the future value of your current investments and savings. Various calculators can ask you for details such as the values of your initial and periodic investments, the number of years (period) and the interest rate.
How to Calculate the Maturity Amount of Your Investment?
You can use the many future value calculators accessible online to derive such values. These calculators help you acquire an estimate for better financial planning. They also help you identify which long-term investment can give you returns above inflation. Moreover, you can come to an estimate within seconds of entering your data, which is quicker and more accurate than any manual calculations.
Here’s how most future value calculators work.
- Step 1: Enter your investment amount. This could be a single investment amount or an initial investment amount and the periodic investment amount.
- Step 2: Enter the rate of interest into the calculator
- Step 3: Type in the number of periods of your investment
- Step 4: The future value, present value, total periodic investment, and total interest will be displayed on your screen
So, what are the factors that come into play during the calculation of the future value? They are as follows.
- Present Value: This is the asset’s current monetary value
- Number of Periods: The duration for which you investment shall last
- Rate of interest: This refers to the percentage of returns you can get above the deposited amount
- Compounding: This is how your interest returns compound during your investment duration
- Cash Flow Annuity: The cash you expect to receive as returns during each period
- Quantity of Payments: The number of payments made in a year
- Future Value: This is the answer you wish to derive through the calculator in order to understand where your current investments could stand in the future
How Do Such Calculators Work?
Here’s how you can manually calculate the future value of your current investment through the following formula.
A = PMT[(1+r/n)^nt–1)/(r/n)]
Here, A = The future value of the investment
PMT = Value of payment amount as per each period
r = Rate of interest
nt = Annual record of the number of compounds
t = number of years of the investment
PMT = Value of payment amount as per each period
r = Rate of interest
nt = Annual record of the number of compounds
t = number of years of the investment
Now, let’s look at an example to understand this calculation better.
PMT = ₹10,000
r = 8%
n = 12 (monthly compounding)
t = 10 years
PMT = ₹10,000
r = 8%
n = 12 (monthly compounding)
t = 10 years
Therefore, A = 10,000[(1+0.08/12)^120 –1/(0.08/12)]
A = ₹18,29,460
A = ₹18,29,460
If deposits are made at the commencement of each period, you can use the following formula.
A = PMT[{(1+r/n)^(nt)–1)/(r/n)}*(1+r/n)]
Using the figures stated above, let’s try to calculate the future value of an investment.
A = 10,000 [{(1+0.08/12)^120 -1) / (0.08/12)} * (1+0.08/12)]
A = ₹18,17,345
A = ₹18,17,345
Conclusion
When you step into the world of investments, walking in without much knowledge on the subject or the market is fine. However, there are certain innate traits that every good investor is born with. It is the ability to read the market, understand your own investment and estimate where your assets shall stand in the future. One must hone this crucial intuitive trait as a long-term investor.
However, with the onset of digital future value calculators and fixed deposit interest calculators being available on the internet, deriving the future value of your investment is a matter of a few seconds and a few clicks. Hence, it is necessary to understand exactly how these calculators work, how you can use them, and the kind of maths behind such calculations. This is not just for the future of your assets but also the future of your present dreams and ambitions.
Topics : Investment
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First Published: Mar 23 2023 | 11:16 PM IST