When it comes to mutual fund investments, one can either start a SIP (Systematic Investment Plan) or choose to pay a lumpsum amount. Those who have a high-risk tolerance and generate seasonal revenues might prefer opting for lumpsum investments. While this usually involves higher risk as compared to a SIP, it also involves higher returns in the long run.
Now, before one begins investing, it is very important to have a sound financial plan. Being unable to plan for liquidity can result in the investor having to liquidate their assets at a loss. To avoid this, it is advisable to make use of a lumpsum calculator.
For those who are not familiar with a lumpsum calculator, read on to learn all about what it is and how to use one:
What is a lumpsum calculator?
A mutual fund lumpsum calculator helps in giving the estimate of the returns that an investor can earn by making a lumpsum investment. This calculator displays the value of the wealth that is gained during the investment tenure based on the amount that has been invested.
How does this calculator work?
A mutual fund lumpsum calculator is an online tool that helps in providing an estimate of the returns on lumpsum investments. With the help of this tool, an investor is then able to evaluate whether their chosen investment option is succeeding in meeting their financial goal. This calculator needs three details in order to provide an estimate of the returns. These details include the amount that one wishes to invest, the number of years for which the individual chooses to stay invested, and the expected rate of return that the chosen mutual fund scheme predicts to earn. Once these details are provided to the calculator, it will then be able to calculate the maturity value the investor can earn through their mutual fund investment.
The formula used by the calculator to calculate the mutual fund returns
A mutual fund lumpsum calculator is an automated tool that makes use of a specific formula to arrive at an estimated return on the mutual fund investment. The formula used is:
A = P (1 + r/n) ^nt
In this formula,
A = Estimated return
P = Present value
r = Rate of return
n = Number of compound interests in 1 year
t = Tenure of investment
Investors can make use of this formula to get an estimate of their mutual fund returns. Take a look at the following example:
Rahul decides to invest in mutual funds online and makes a lumpsum investment of Rs 10 lakh in a mutual fund for 5 years. This mutual fund scheme offers an average return rate of 12% per year which compounds every 6 months. In this scenario, Rahul’s estimated return would be:
A = 10,00,000 (1 + 12/2) ^ 2/5
Based on this formula, the estimated returns at the end of the investment tenure would be Rs 17,62,342. Now, manually calculating this could be challenging for a lot of investors. Instead of going through this complicated process, using a mutual fund lumpsum calculator can make calculating the estimated returns of the mutual fund investment easy!