Time Value of Money & When to Start Investing

An Investor Education & Awareness Initiative By Franklin Templeton Mutual Fund

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Savings

The dream home...which was worth Rs 50 lac

few years ago…costs Rs 1 crore today.

Why?

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Time Value of Money

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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

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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

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You will be at an advantage by taking Rs 1 lac today

Why?

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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.

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How to calculate Time Value of Money?(Some basic concepts)

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Simple Interest

Simple interest is the interest you earn only on your principal amount

Simple Interest: Principal X Rate X Number of Years

100

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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.

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Compound Interest

Compound interest is the interest you earn on both principal and interest

Amount = Principal X (1+ Rate/100) N

Compounded Interest = Amount – Principal

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What will be the compound interest ona 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 1,0002nd Year: 11,000 X 10% = Rs 1,100

So total interest you earn in 2 years’ time is Rs 2,100

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Future Value

Inflation increases the cost of goods, year on year basisSo you may need to pay more in future

Future Value = Present Value (1 + Inflation)N

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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?

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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

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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

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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

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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?

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• 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?

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“Compound interest is the eighth wonder of the world. He who understands it, earns it ...

he who doesn't ... pays it.”

– Albert Einstein

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Power Of Compounding

Earning interest on interest refers to Power of Compounding

Longer your time horizon Higher the effect of Power of Compounding

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Longer Your Time Horizon – Higher The Effect Of Power Of Compounding

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

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Impact Of Delay

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

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Cost Of Delay

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

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Points To Remember

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

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Points To Remember

Compound interest yields more return than simple interest

Longer your time horizonHigher 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

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Thank You For Participating!

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Mutual Fund Investments Are Subject To Market Risks, Read All Scheme

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