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3 most Important formulas you should know

MANISH CHAUHAN 32 COMMENTS

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1. Compound Interest
This formula is often used to calculate the returns
some investment has given . The main concept in
compound interest is that interest gets accumulated
with the total principal amount and that interest
again earns interest over the years. Which makes it
very powerful .
Formula : A = P * (1+r/t)^(nt)

Where

P = principal amount (initial investment)

r = annual interest rate (as a decimal)
n = number of times the interest is compounded per year
t = number of years
A = amount after time t
Example 1 :
Investment = Rs 10,000
return = 9%
investment period = 8 years

Total amount = 10000(1+.09)^8 = 19925.63

Example 2 :
Sensex returned 17.3% return over 29yrs since its inception in 1979 . What would be worth of Rs 10,000
invested that time .
A = 10,000 * (1+.173)^29 = 1022450.64 (10 lacs)

You can see that a small amount has actually grown to 100 times .
Compound interest Calculator : http://math.about.com/library/blcompoundinterest.htm

2. CAGR
This tool is very important because it helps in comparing two differnt returns from two investments , you
can calculate how much an investment has returned per year on compounded basis , Its just the opposite of
Compound interest
Formula : CAGR = (A/P)1/n 1
where:

A = Final amount
P = amount invested
n = Number of years
CAGR can be a great tool to compare two different investments and there returns .
Example :
A. 10,000 invested in a XYZ mutual fund for 2 yrs became 20,000
B. 50,000 invested in GOLD for 7 years became 4,00,000
Which investment has given more returns ?
Here the main doubt is that how to calculate which one is better .. the amount , tenure is different . So in
this case we calculate and see CAGR , one with more CAGR will be good .
A) CAGR = 41.42 %
B) CAGR = 34.59 %
So , investment in A is better than B.
Which
CAGR calculator : http://www.moneychimp.com/calculator/discount_rate_calculator.htm

3. Annuity
This formula is very very important one , in our daily life we come across many situation where we do a
xed payment at the xed interval , and we want to calculate the returns , but we dont know how to do it ..
Example can be

Monthly payments in Mutual funds through SIP

Yearly payment in a PPF .
Or any investment at a xed inteval over some years. In that case we calculate the Final value using formula
called Annuity .

Formula : A = P * [{(1+i)^n 1 }/i] * (1+i) (if payment are being made at the start)
(it will be P * [{(1+i)^n 1 }/i] if payments are made at the end of the year)
Where :

A = nal amount
P = installment each time
n = total number of installments
i = interest rate for that tenure (example if yearly return is 24% , but payments are made monthly then i =
24/12 = 2%)
Example 1 :
Robert invests 10,000 each month in a mutual fund for 10 years and the annual return was 18% , what will
be his nal corpus ?
Here as payments are monthly , total payment will be 10 * 12 = 120

Calculate your SIP

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so n = 120 and i = 1.5 % (18/12)

A = 10,000 * [{(1+ .015)^120 1}/.015 ] * (1+ .015)
=> 40,39.241 (40 lacs)
Example 2 :
Vikas is planning his retirement , and planning to
invest 5,000 per month in a Mutual fund for 20 yrs
where he expects a return of 15% , then take out all
the amount after 20 yrs and then put it in a FD for
15 yrs which gives him 9.5% return .

Here , we there are two parts

A. He makes monthly payment for 20 yrs (here we have to apply annuity)
B. then he takes the money out after 20 yrs and then put it in FD for 15 yrs (as this is one time payment ,
here we will apply compound interest)

A)
n = 240 and i = 1.25% (as the payment are monthly)
His money after 20 years = [5,000 * (1 + .0125)^240 1) / .0125] * ( 1.0125) = 75,80,000 (75 lacs)

Now he invests this money into a FD for 15 yrs at 9.5% .

B) Final amount = 75,80,000 * (1.095)^15 = 2,95,00,000 (2.95 crores OR 29.5 millions)
So his nal corpus will be 2.95 crores .
Calculator : http://www.moneychimp.com/calculator/annuity_calculator.htm

Note : You can also nd some calculators at http:// nance-and-

investing.blogspot.com/2008/05/calculators.html

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Add Comment

Manish Goyal
May 13, 2014 at 12:39 pm

Dear Manish,
I am 39 years old engineering professional, looking into investment of tune 30004000/- per month in SIP for my future goals, please advise which SIPs is better
performing etc.
With Regards,
Manish Goyal
Reply

Manish Chauhan
May 19, 2014 at 9:00 am

There is always mutual funds who have already performed well, you can
never guarantee future, but some good picks can be suggested to you at our
Q&A forum http://www.jagoinvestor.com/forum
Reply

Jose Paul
May 11, 2013 at 12:47 pm

Dear Manish Chauhan, Thanks for your informative article. The only request is that
before posting an authentic article check twice or thrice. The reason is we are not
expert in nacial matters. We simply follow the experts directives when we need a
ancial guidance. It should not happened in future that after reading your article waite
for other experts commend. Wishing a successful carreer.
Reply

Manish Chauhan
May 11, 2013 at 12:54 pm

Not sure why you made that comment , Is any thing wrong in the article ?
Please point it out to me !
Reply

Manish Chauhan
May 18, 2013 at 2:13 pm

I am not sure of your comment, which part you feel is unauthentic ?

Reply

Chetan
August 5, 2013 at 9:16 am

Manish, I think he is referring to mistakes in the formula in the

article. I still see you have not corrected it in the main article above.
Request you to correct it so that nobody will pin point our dear
Manish again
Reply

Manish Chauhan
August 5, 2013 at 10:12 am

Will do
Reply

Gauri
February 22, 2013 at 12:01 am

First of all, this is a very great article! thanks for writing!

While trying to nd how much money a particular MF will make, I came across your
article. I see websites like moneycontrol, valueresearchonline show CAGR of the MF
for different years. I did some calculation and want to verify if they are correct.if
not, then what is the correct way to work with them
Say I invest 10,000 in an FD@ 8%/annum for 5 yrs and same 10,000 in a MF ( Birla
Sunlife Frontline Eq) with the CAGR for 5 yrs @ 7.7% ( Source MoneyControl). So
according to my calculation, the FD gives: 14,693 and the MF gives 14,490. Even if you
deduct TDS from the FD, the overall returns are not that great!! Am I missing
something here
Reply

Manish Chauhan
February 25, 2013 at 6:12 pm

The only thing is FD returns are guaranteed and predictable, while Mutual
funds are not . You might have looked at the past 5 yrs return ,but thats not
always the same .. if you have looked in 2008 , the past 5 yrs return would be
close to 30% per annum
Reply

Prashant
May 26, 2012 at 11:19 pm

Thanks Manish for this fantastic article.

Are all formulas updated and can i use these formulas to calculate my investment
plans?
Reply

Manish Chauhan
May 27, 2012 at 1:34 pm

Yes you can use these

Reply

Manish Ahir
September 20, 2012 at 11:57 pm

Sir I follow you a lot you are my IDOL , ANGEL , ZODIAC SIGN ,
LUCKY PLANET MY MOON , SUN everything.
Reply

Manish Chauhan
September 22, 2012 at 1:20 pm

Thanks Manish
Reply

Fresher
March 8, 2012 at 12:20 pm

Excellent blog, Manish. Most topics are quite informative.

Looks like there is a minor error in the Compound Interest formula. Shouldnt it be A =
P * (1+r/n)^(nt)?
Reply

Manish Chauhan
March 8, 2012 at 4:05 pm

Yea thats correct . looks like I made a mistake .

Reply

Rohit Varma
October 5, 2012 at 10:23 pm

Hi Manish,
Looks like the formulae is still the same. Can you please correct it
It should be r/n rather than r/t
Thanks
Reply

Sujith johny
January 31, 2012 at 10:36 pm

This is really helpful for a salary holder like me.

Reply

Manish Chauhan
February 2, 2012 at 3:59 pm

Sujith
Goodto know that !
Reply

anonymus
January 16, 2012 at 11:07 pm

Correction in SIP formula:

(10000*(((1+18%/12)^(10*12))-1))/(18%/12) = 3312881.91
(5000*(((1+15%/12)^(20*12))-1))/(15%/12) = 7486197.40
Reply

Manish Chauhan
January 18, 2012 at 8:21 pm

Anonymous
Thats correct. . but which one is wrong in the arrticle ? I have assumed the
payments made in the start of the months and hence (1+r) is multiplied extra
Manish
Reply

Balbir
September 13, 2010 at 9:41 pm

Hi Manish,
Just wondering whether CAGR and annualized return are same? Kindly con rm
CAGR is initial and nal amount, and year difference between them. We nd the
compounded annual return using that initial amount which became the nal amount
over a period of time.
I have seen annualized return term in Mutual fund performance report.
Thank you,
Balbir
Reply

Manish Chauhan
September 13, 2010 at 10:15 pm

Balbir
Yea they are same . CAGR is a fancy name to scare people
Manish
Reply

Rajesh
August 18, 2010 at 12:00 am

First things rst, AMAZING blog. Kudoscame to know a lot about nancial planning.
Also you acknowledged the typo in the compound interest formula but did edit your
blog entry yet???
Reply

Manish Chauhan
August 25, 2010 at 8:16 pm

Rajesh
The formula is corrrect , I made a calculation mistake it seems last time
Manish
Reply

Mahesh
July 27, 2010 at 7:58 pm

First let me appreciate your hard work . I am learning lot of thing through your blog
which i should have learned very back
is there any formula where we can calculate rate of intrest for LIC policy?
For eg. Suppose i hav 2-3 lic policy and i want to calculate what rate of intrest i am
getting after maturity of my policy?
Reply

Manish Chauhan
July 27, 2010 at 9:56 pm

Mahesh
thanks , For returns from LIC ,there is no special formula especially for LIC
policies , but there is something called as IRR and XIRR , which is a general
concept which you can use to calculate LIC policies returns ,
http://www.jagoinvestor.com/2009/08/what-is-irr-and-xirr-and-howto.html
Manish
Reply

Manish Chauhan
October 6, 2009 at 2:33 pm

@Anonymous
Yup .. its a typo from my side .. thanks for correcting it
Reply

Rahul
February 13, 2010 at 11:45 pm

u sure ur annuity 1st eg is correct ??

im getting arnd 33.6 lac..??
Reply

Kamal
February 16, 2010 at 3:13 pm

@Rahul,
I agree with you, it comes to ~33.6 lacs.
Looks like he has missed to substract 1 from (1+.015)^120, that
way it comes to ~40.39 lacs.
@manish,
can you please correct the calculation mistake if I am not wrong.
Reply

Manish Chauhan
February 18, 2010 at 2:01 am

@Kamal and @Rahul

You guys are correct . I am wrong

I forgot to subtract 1 i guess ..

Manish
Reply

Anonymous
October 6, 2009 at 1:35 pm

Compound interest formula is : A = P * (1+r/n)^(nt) and not A = P * (1+r/t)^(nt).

Typo ?
Reply

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