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Return on Investment Calculator Precise Manipulations The singular factor that determines investments is the return or the profit

that an investor expects to gain from the particular investment. To determine whether investments are profitable or not, its returns have to be calculated accurately. This focuses on the significance of investment calculators that accurately calculate the investment returns. Defining Investment Calculators Investment calculators calculate the returns that a particular investment would yield after the maturity period. Investors need to calculate the future returns for making current investments and ensure that the investments would be profitable for them. Usually, the investment calculators calculate the returns on an annual basis. With the help of the calculators, the investors can calculate the returns that they can earn by liquidating the investments after a particular time period. The calculator assumes simple interest rather than compound interest on investments. Functions of Investment Calculators Investment calculators are used for various aspects related to investments. Some of the main uses of investment calculators are as follows: 1) Interest Rate: The premier function of investments is to calculate the rate of return or the rate of interest that the investments are expected to earn within a fixed period of time. It calculates the compound rate of interest that an investor expects from a particular investment. The calculator calculates these returns considering that there are no tax deductions. The rate of return is calculated considering the type of investments. 2) Investment Risk: It is necessary to calculate the risk to returns ratio before making the investments. Investors can earn higher returns by taking higher risks. Hence, it is essential to calculate the extent of risk that an individual needs to take in order to gain the required returns. 3) Compound Interest: Investment calculators perform an important task of calculating the compound interest that an investor earns. Compound interest refers to the current interest earned in addition to the interest of the previous year. Compound interest is difficult to calculate as interest rates keep on changing with market fluctuations. 4) Initial Investment: The investment calculator also calculates the initial investment that an investor has made. 5) Inflationary Rate: Inflationary rate is constantly fluctuating and due to it the value of the returns also changes. Hence, it is necessary to calculate the returns considering the inflationary rate fluctuations. 6) Tax Constraints: The investment calculators calculate the tax constraints or tax impositions on an investment that an investor is liable to. This calculation is important as it gives the precise idea to the individual about the amount that he would eventually get by reducing the taxes. 7) Simple Interest: The investment calculator also performs the function of calculating simple interest that an investment earns. This interest is calculated after deducting the tax amount. Hence, it calculates the net investment returns that an investor is expected to earn. Types of Investment Calculators There are different calculators in order to calculate the various aspects of investments independently. The specialized calculators indicate the effect that each factor has on the total returns on the investments. Some of the important types of calculators are as follows: 1) Time Value Calculator: As the name suggests, this type of calculator analyses the effect of time on investment returns. The calculator calculates the effect of time on the basis of the initial investment amount and the additional

amount that an investor intends to invest. It also considers the time intervals between subsequent investments. The investors can calculate the rate of returns that they would get after a particular period of time. 2) Cost Averaging Calculators: This type of calculator calculates the returns on the basis of the monthly investments made by an individual and also the price of every share that the investor has purchased. With this calculator investors can get a fair idea of the returns that different shares of different profiles are expected to provide. The calculators can consider shares of rising, declining and fluctuating natures. 3) Inflationary Calculator: This calculator calculates the returns on the basis of the inflationary trends prevailing in the country. This is important as inflation can reduce the value of the returns. 4) Real Estate Investment Calculator: There are calculators that exclusively determine the value of returns acquired from real estate investments. These calculators consider the loan payments and the real estate market conditions while determining the value of the returns. 5) There are some other calculators that calculate the exact value of stocks, debts and shares that an investor may earn after a period of time or after the maturity period. Tips for Investment Calculators To get the accurate rate of returns, it is important that the investor follows certain tips for using the calculators. The calculators are complex mechanisms that calculate the rate of returns precisely by following the tips given below: 1) Investors must begin on a trial basis. They must first calculate the returns on investments through examples and ensure that they are handling the calculators perfectly. Once the investor has perfected the art of using it, he can then move on to calculating the returns for his personal investments. 2) It is essential that the investor use the calculator on a regular basis in order to make the calculations properly. 3) Investors must calculate the returns by considering various rates of interest. This provides them with a good idea about the returns they can expect if the market rate of interest fluctuates to various rates. 4) Investors must also calculate the amount that they need to save every year in order to invest in their desired instruments. It is also important for the investors to consider the period left till they get retired and the amount of savings that they need to do on this basis. 5) Along with every type of calculator, there are instructions provided for the benefit and smooth use of the investor. The investors must follow the given steps and instructions carefully while making the calculations. Investment returns calculators are imperative and extremely necessary for the investors. They give the exact amount that the investors stand to gain by making a certain investment. Hence, investors must have an access to an investment calculator that calculates the returns accurately

7 investment risks and how to deal with them The fact is that you cannot get rich without taking risks. Risks and rewards go hand
in hand; and, typically, higher the risk you take, higher the returns you can expect. In fact, the first major Zurich Axiom on risk says: "Worry is not a sickness but a sign of health. If you are not worried, you are not risking enough". Then the minor axiom says: "Always play for meaningful stakes". The secret, in other words, is to take calculated risks, not reckless risks. In financial terms, among other things, it implies the possibility of receiving lower than expected return, or not receiving any return at all, or even not getting your principal amount back. Every investment opportunity carries some risks or the other. In some investments, a certain type of risk may be predominant, and others not so significant. A full understanding of the various important risks is essential for taking calculated risks and making sensible investment decisions. Seven major risks are present in varying degrees in different types of investments. Default risk This is the most frightening of all investment risks. The risk of non-payment refers to both the principal and the interest. For all unsecured loans, e.g. loans based on promissory notes, company deposits, etc., this risk is very high. Since there is no security attached, you can do nothing except, of course, go to a court when there is a default in refund of capital or payment of accrued interest. Given the present circumstances of enormous delays in our legal systems, even if you do go to court and even win the case, you will still be left wondering who ended up being better off - you, the borrower, or your lawyer! So, do look at the CRISIL / ICRA credit ratings for the company before you invest in company deposits or debentures. Business risk The market value of your investment in equity shares depends upon the performance of the company you invest in. If a company's business suffers and the company does not perform well, the market value of your share can go down sharply.

This invariably happens in the case of shares of companies which hit the IPO market with issues at high premiums when the economy is in a good condition and the stock markets are bullish. Then if these companies could not deliver upon their promises, their share prices fall drastically. When you invest money in commercial, industrial and business enterprises, there is always the possibility of failure of that business; and you may then get nothing, or very little, on a pro-rata basis in case of the firm's bankruptcy. A recent example of a banking company where investors were exposed to business risk was of Global Trust Bank. Global Trust Bank, promoted by Ramesh Gelli, slipped into serious problems towards the end of 2003 due to NPA-related issues. However, the Reserve Bank of India's [ Get Quote ] decision to merge it with Oriental Bank of Commerce [Get Quote ] was timely. While this protected the interests of stakeholders such as depositors, employees, creditors and borrowers was protected, interests of investors, especially small investors were ignored and they lost their money. The greatest risk of buying shares in many budding enterprises is the promoter himself, who by overstretching or swindling may ruin the business. Liquidity risk Money has only a limited value if it is not readily available to you as and when you need it. In financial jargon, the ready availability of money is called liquidity. An investment should not only be safe and profitable, but also reasonably liquid. An asset or investment is said to be liquid if it can be converted into cash quickly, and with little loss in value. Liquidity risk refers to the possibility of the investor not being able to realize its value when required. This may happen either because the security cannot be sold in the market or prematurely terminated, or because the resultant loss in value may be unrealistically high. Current and savings accounts in a bank, National Savings Certificates, actively traded equity shares and debentures, etc. are fairly liquid investments. In the case of a bank fixed deposit, you can raise loans up to 75% to 90% of the value of the deposit; and to that extent, it is a liquid investment. Some banks offer attractive loan schemes against security of approved investments, like selected company shares, debentures, National Savings Certificates, Units, etc. Such options add to the liquidity of investments.

The relative liquidity of different investments is highlighted in Table 1.


Table 1 Liquidity of Various Investments Liquidity Very high High Some Examples Cash, gold, silver, savings and current accounts in banks, G-Secs Fixed deposits with banks, shares of listed companies that are actively traded, units, mutual fund shares Fixed deposits with companies enjoying high credit rating, debentures of good companies that are actively traded Deposits and debentures of loss-making and cash-strapped companies, inactively traded shares, unlisted shares and debentures, real estate

Medium

Low and very low

Don't, however, be under the impression that all listed shares and debentures are equally liquid assets. Out of the 8,000-plus listed stocks, active trading is limited to only around 1,000 stocks. A-group shares are more liquid than B-group shares. The secondary market for debentures is not very liquid in India. Several mutual funds are stuck with PSU stocks and PSU bonds due to lack of liquidity. Purchasing power risk, or inflation risk Inflation means being broke with a lot of money in your pocket. When prices shoot up, the purchasing power of your money goes down. Some economists consider inflation to be a disguised tax. Given the present rates of inflation, it may sound surprising but among developing countries, India is often given good marks for effective management of inflation. The average rate of inflation in India has been less than 8% p.a. during the last two decades. However, the recent trend of rising inflation across the globe is posing serious challenge to the governments and central banks. In India's case, inflation, in terms of the wholesale prices, which remained benign during the last few years, began firming up from June 2006 onwards and topped double digits in the third week of June 2008.

The skyrocketing prices of crude oil in international markets as well as food items are now the two major concerns facing the global economy, including India. Ironically, relatively "safe" fixed income investments, such as bank deposits and small savings instruments, etc., are more prone to ravages of inflation risk because rising prices erode the purchasing power of your capital. "Riskier" investments such as equity shares are more likely to preserve the value of your capital over the medium term. Interest rate risk In this deregulated era, interest rate fluctuation is a common phenomenon with its consequent impact on investment values and yields. Interest rate risk affects fixed income securities and refers to the risk of a change in the value of your investment as a result of movement in interest rates. Suppose you have invested in a security yielding 8 per cent p.a. for 3 years. If the interest rates move up to 9 per cent one year down the line, a similar security can then be issued only at 9 per cent. Due to the lower yield, the value of your security gets reduced. Political risk The government has extraordinary powers to affect the economy; it may introduce legislation affecting some industries or companies in which you have invested, or it may introduce legislation granting debt-relief to certain sections of society, fixing ceilings of property, etc. One government may go and another come with a totally different set of political and economic ideologies. In the process, the fortunes of many industries and companies undergo a drastic change. Change in government policies is one reason for political risk. Whenever there is a threat of war, financial markets become panicky. Nervous selling begins. Security prices plummet. In case a war actually breaks out, it often leads to sheer pandemonium in the financial markets. Similarly, markets become hesitant

whenever elections are round the corner. The market prefers to wait and watch, rather than gamble on poll predictions. International political developments also have an impact on the domestic scene, what with markets becoming globalized. This was amply demonstrated by the aftermath of 9/11 events in the USA and in the countdown to the Iraq war early in 2003. Through increased world trade, India is likely to become much more prone to political events in its trading partner-countries. Market risk Market risk is the risk of movement in security prices due to factors that affect the market as a whole. Natural disasters can be one such factor. The most important of these factors is the phase (bearish or bullish) the markets are going through. Stock markets and bond markets are affected by rising and falling prices due to alternating bullish and bearish periods: Thus:

Bearish stock markets usually precede economic recessions. Bearish bond markets result generally from high market interest rates, which, in turn, are pushed by high rates of inflation. Bullish stock markets are witnessed during economic recovery and boom periods. Bullish bond markets result from low interest rates and low rates of inflation.

How to manage risks Not all the seven types of risks may be present at one time, in any single investment. Secondly, many-a-times the various kinds of risks are interlinked. Thus, investment in a company that faces high business risk automatically has a higher liquidity risk than a similar investment in other companies with a lesser degree of business risk. It is important to carefully assess the existence of each kind of risk, and its intensity in whichever investment opportunity you may consider. However, let not the very presence of risk paralyse you into inaction. Please remember that there is always some risk or the other in every investment option; no risk, no gain!

What is important is to clearly grasp the nature and degree of risk present in a particular case and whether it is a risk you can afford to, and are willing to, take. Success skill in managing your investments lies in achieving the right balance between risks and returns. Where risk is high, returns can also be expected to be high, as may be seen from Figure 1

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