Time Value Of Money & When to Start Investing
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The inflation bug as we learnt in our earlier learning ppt, "Are you Saving or Are you Investing", eats into our hard earned savings. So the value of our money reduces. Here in this learning session let’s learn more about “Time Value of Money”, which can help you manage your finances better. An Investor Education & Awareness Initiative By Franklin Templeton Mutual Fund
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Time Value Of Money & When to Start Investing
- 1. Time Value of Money & When to Start Investing An Investor Education & Awareness Initiative By Franklin Templeton Mutual Fund
- 2. Savings 1 The dream home... which was worth Rs 50 lac few years ago… costs Rs 1 crore today. Why?
- 3. 2 Time Value of Money
- 4. 3 Inflation Value of all Goods and Services Purchasing Power of Money Impact Today your Rs 500 note is worth less than what it was a few years ago
- 5. 4 What will you choose? Suppose you have won prize money in a contest and you have the option to receive Rs 1 lac today or after 1 year
- 6. 5 You will be at an advantage by taking Rs 1 lac today Why?
- 7. 6 If you choose to take it after 1 year, you may be losing out on the interest that you may earn over the next 1 year… Rs 1 lac invested today = 1.08 lac after 1 year [100,000 X 8% = 108,000] Rate of interest of 8% is used for illustrative purpose only.
- 8. 7 How to calculate Time Value of Money? (Some basic concepts)
- 9. Simple Interest 8 Simple interest is the interest you earn only on your principal amount Simple Interest: Principal X Rate X Number of Years 100
- 10. 9 So total interest you earn in 2 years’ time is Rs 2,000 What will be the simple interest on a 2 year deposit of Rs 10,000 offering interest @ 10% p.a.? Simple Interest: 10,000 X 10% = Rs 1,000 p.a.
- 11. Compound Interest 10 Compound interest is the interest you earn on both principal and interest Amount = Principal X (1+ Rate/100) N Compounded Interest = Amount – Principal
- 12. 11 What will be the compound interest on a 2 year deposit of Rs 10,000 @ 10% p.a.? Amount: 10,000 (1 + 10%)2 = Rs 12,100 Compound Interest: Rs 12,100 – Rs 10,000 = Rs 2,100 1st Year: 10,000 X 10% = Rs 1,000 2nd Year: 11,000 X 10% = Rs 1,100 So total interest you earn in 2 years’ time is Rs 2,100
- 13. Future Value 12 Inflation increases the cost of goods, year on year basis So you may need to pay more in future Future Value = Present Value (1 + Inflation)N
- 14. 13 Future Value: 50 (1 + 10%) 1 = Rs 55 Say a packet of milk costs Rs 50 today and the inflation rate is 10%. So in this case, what will be the cost of the packet of milk after 1 year?
- 15. Present Value 14 Real value of money in hand goes on decreasing because of inflation So in future, your money needs to maintain pace with inflation Present Value = Future Value (1 + Inflation)N
- 16. 15 Say, you have Rs 100 in your pocket today, but will the value of Rs 100 be the same 1 year hence assuming inflation rate of 10%? Present Value = 100 (1 + 10%) 1 = Rs 90.91
- 17. Real Rate Of Return 16 The Real Rate of Return you earn on your investment reduces due to inflation Real Rate of Return = Rate of Return on Investment – Inflation
- 18. 17 Real Rate of Return = 15% - 10% = 5% If the Rate of Return on your investment is 15% and inflation is 10%, then what will be your real rate of return?
- 19. • If you are already saving, then you are just one step away from starting your investment • It is never early to start investing, but you can be late • You should not wait for the right time to start investing • Instead you may gradually start investing • Starting early has its benefits! When To Start Investing? 18
- 20. 19 “Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.” – Albert Einstein
- 21. Power Of Compounding 20 Earning interest on interest refers to Power of Compounding Longer your time horizon Higher the effect of Power of Compounding
- 22. Longer Your Time Horizon – Higher The Effect Of Power Of Compounding 21 Disclaimer: The figures are fictitious and used for example purpose only. Also, the interest rate mentioned above is for illustration purpose only. Rs 1,000 p.m. @ 10% p.a. Starting Age Total Amount Saved (Rs) Value at the Age of 60 (Rs) 25 Rs.4.20 lacs Rs.38.28 lacs 30 Rs.3.60 lacs Rs.22.79 lacs 35 Rs.3.00 lacs Rs.13.38 lacs 40 Rs.2.40 lacs Rs.7.66 lacs
- 23. Impact Of Delay 22 Disclaimer: The names and figures are fictitious and used for example purpose only. Particulars Ram Shyam Starts investing at the age of 25 45 Monthly Savings (Rs) 5000 15000 Returns p.a. (Assumed) 12.00% 12.00% Investment till the age of 55 55 Total Investment (Rs) Rs.18 lacs Rs.18 lacs Accumulated amount at Age 55 (Rs) Rs.1.76 crore Rs.34.85 lacs
- 24. Cost Of Delay 23 Disclaimer: The names and figures are fictitious and used for example purpose only. To catch up with Ram, Shyam has two choices: Earn on his investment 36.23% OR Save per month 75,965
- 25. Points To Remember 24 Inflation decreases the value of money over time Prices of goods and services keep on increasing due to inflation Money received today is worth more than the same amount of money received after a few years In real terms, inflation also reduces the actual return you earn on your investment
- 26. Points To Remember 25 Compound interest yields more return than simple interest Longer your time horizon Higher will be the effect of Power of Compounding You should not wait for the right time to start investing It is never early to start investing, but you can be late
- 27. 26 Thank You For Participating!
- 28. 27 Mutual Fund Investments Are Subject To Market Risks, Read All Scheme Related Documents Carefully.
- 29. © 2014 Franklin Templeton Investments. All rights reserved. Franklin Templeton Asset Management (India) Pvt. Ltd. Indiabulls Finance Centre, Tower 2, 12th and 13th floor, Senapati Bapat Marg, Elphinstone (W) Mumbai 400013 Tel (91-22) 6751 9100 Fax (91-22) 6639 1281 http://www.franklintempletonindia.com
Notes de l'éditeur
- The inflation bug as we learnt in our earlier learning session eats into our hard earned savings. So the value of our money reduces. Here in our today’s learning session let’s learn more about “Time Value of Money”, which can help you manage your finances better. Here’s an example.
- (Most of us vie to buy our dream home; so let’s take the example of a house that you want to buy) The dream home...which was worth Rs 50 lac few years ago…costs Rs 1 crore today. (Why?) The above example is hypothetical and for illustrative purposes only.
- (You see, as inflation, or simply put, the cost of living, increases, it erodes the purchasing power of your hard earned money. Let’s understand how it works and its impact) Inflation (Increases) Value of all Goods and Services (Increases) Purchasing Power of Money (Decreases) Impact – Today your Rs 500 note is worth less than what it was a few years ago
- (To make things simpler, let’s take an example here.) Suppose you have won prize money in a contest and you have the option to receive Rs 1 lac today or after 1 year What will you choose?
- (Well, rationally…) You will be at an advantage by taking (your prize money of) Rs 1 lac today Why?
- If you choose to take it after 1 year, you may be losing out on the interest that you may earn over the next 1 year… Rs 1 lac invested today = 1.08 lac after 1 year [100,000 X 8% = 108,000] Rate of interest of 8% is used for illustrative purpose only.
- (Now let us see how to calculate time value of money. But before that, first, let us understand some basic concepts.) How to calculate Time Value of Money? (Some basic concepts)
- (First: simple interest. Well, this is something we have all learnt in our school and college days and sometimes even put it to practice in our daily life. But just to brush-up…) Simple Interest Simple interest is the interest you earn only on your principal amount Simple Interest: Principal X Rate X Number of Years 100 (Let’s use an example to understand it better.)
- What will be the simple interest on a 2 year deposit of Rs 10,000 offering interest @ 10% p.a.? Simple Interest: 10,000 X 10% = Rs 1,000 p.a. (The deposit of Rs 10,000 will yield Rs 1,000 p.a. for the next 2 years) So total interest you earn in 2 years’ time is Rs 2,000
- (The next is compound interest, which again many of us may have heard or learnt about…and it’s rather magical in the process of wealth creation. Just to brush-up…) Compound Interest Compound interest is the interest you earn on both principal and interest Compound Interest: Amount = Principal X (1+ Rate/100) N Compounded Interest = Amount – Principal (Again let’s take an example to understand it better.)
- (Moving a little forward from the basic concepts here are some very vital concepts in time value of money, which can help you on the path to wealth creation.) (The first one…) Future Value Inflation increases the cost of goods, year on year basis So you may need to pay more in future Future Value = Present Value (1 + Inflation)N
- (Let us understand this with the help of an example…) Say a packet of milk costs Rs 50 today and the inflation rate is 10%. So in this case, what will be the cost of the packet of milk after 1 year? (Well, if we use the formula which we just saw; you have the answer … and the answer is Rs 55) Future Value: 50 (1 + 10%) 1 = Rs 55 (So you would be effectively paying Rs 5 more for the same packet of milk after a year due to the effect of 10% inflation rate)
- (The next important concept is…) Present Value Real value of money in hand goes on decreasing because of inflation So in future, your money needs to maintain pace with inflation Present Value = Future Value (1 + Inflation)N (Let us take this up with the help of an example…)
- Say, you have Rs 100 in your pocket today, but will the value of Rs 100 be the same 1 year hence assuming inflation rate of 10%? (Using the formula that we learnt in the previous slide – After 1 year the Rs 100 note will be worth just Rs. 90.91 – in today’s terms – assuming inflation rate of 10%) Present Value = 100 = Rs 90.91 (1 + 10%) 1 (So inflation has clearly eroded the purchasing power of your hard earned money. And to catch-up with this erosion, one needs to invest wisely!)
- (…And while you want to invest wisely, knowing the real rate of return that you are earning on your investments would help you earn effectively.) Real Rate of Return The Real Rate of Return you earn on your investment reduces due to inflation Real Rate of Return: Rate of Return on Investment – Inflation
- (Take this case…) If the Rate of Return on your investment is 15% and inflation is 10%, then what will be your real rate of return? (With the help of the formula) Real Rate of Return: 15% - 10% = 5% (So your Real Rate of Return is just 5%)
- (Many of you may have recognised that the answer to counter inflation is investing. But the question arises: when should you start investing?)
- (To understand the benefit of starting early, let’s take the famous quote of Mr Albert Einstein, a renowned scientist. He said…)
- (Now to understand the effect of power of compounding, let’s take a case study here…) Longer your time horizon – Higher the effect of Power of Compounding (The table here indicates - what will be the value of one’s saving at the age of 60, if someone would have started at the age of say…….)
- (…And what happens when one delays investing?)
- (Before we wrap-up this session of learning, here are some points you must keep in mind while managing your finances - to recognise that the key lies in investing…and investing wisely) Points to Remember Inflation decreases the value of money over time Prices of goods and services keep on increasing due to inflation (so you may have to spend more in the future) Money received today is worth more than the same amount of money received after a few years In real terms, inflation also reduces the actual return you earn on your investment (so do not forget to consider it while investing)
- Points to Remember Compound interest yields more return than simple interest (do not forget; the power of compounding is the eight wonder) (And) Longer your time horizon – Higher will be the effect of Power of Compounding You should not wait for the right time to start investing It is never early to start investing, but you can be late (So start early and gradually reap the benefits we just learnt)