Time Value of Money & When to Start Investing

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1 Time Value of Money & When to Start Investing An Investor Education & Awareness Initiative By Franklin Templeton Mutual Fund

4 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 2014 Franklin Templeton Investments. All rights reserved.

7 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 Franklin Templeton Investments. All rights reserved.

9 Simple Interest Simple interest is the interest you earn only on your principal amount Simple Interest: Principal X Rate X Number of Years 100 8

10 What will be the simple interest on a 2 year deposit of Rs 10,000 offering 10% p.a.? Simple Interest: 10,000 X 10% = Rs 1,000 p.a. So total interest you earn in 2 years time is Rs 2, Franklin Templeton Investments. All rights reserved.

11 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

12 What will be the compound interest on a 2 year deposit of Rs 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, Franklin Templeton Investments. All rights reserved. 11

13 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

14 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? Future Value: 50 (1 + 10%) 1 = Rs Franklin Templeton Investments. All rights reserved.

15 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

16 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 Franklin Templeton Investments. All rights reserved.

17 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

18 If the Rate of Return on your investment is 15% and inflation is 10%, then what will be your real rate of return? Real Rate of Return = 15% - 10% = 5% 2014 Franklin Templeton Investments. All rights reserved.

19 When To Start Investing? 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! 18

21 Power Of Compounding Earning interest on interest refers to Power of Compounding Longer your time horizon Higher the effect of Power of Compounding 20

22 Longer Your Time Horizon Higher The Effect Of Power Of Compounding Rs 1,000 10% p.a. Starting Age Total Amount Saved (Rs) Value at the Age of 60 (Rs) 25 Rs.4.20 lacs Rs lacs 30 Rs.3.60 lacs Rs lacs 35 Rs.3.00 lacs Rs lacs 40 Rs.2.40 lacs Rs.7.66 lacs Disclaimer: The figures are fictitious and used for example purpose only. Also, the interest rate mentioned above is for illustration purpose only. 21

23 Impact Of Delay Particulars Ram Shyam Starts investing at the age of Monthly Savings (Rs) Returns p.a. (Assumed) 12.00% 12.00% Investment till the age of Total Investment (Rs) Rs.18 lacs Rs.18 lacs Accumulated amount at Age 55 (Rs) Rs.1.76 crore Rs lacs Disclaimer: The names and figures are fictitious and used for example purpose only. 22

24 Cost Of Delay To catch up with Ram, Shyam has two choices: Earn on his investment 36.23% OR Save per month 75,965 Disclaimer: The names and figures are fictitious and used for example purpose only. 23

25 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 24

26 Points To Remember 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 25

27 Lets Do A Short Quiz! we now invite you to test your learning by taking up this simple quiz (and win exciting prizes!) 26

28 Quick Quiz 1) What will be the total interest earned in 3 years if you invest Rs. 1 lac in an account earning 6% p.a. simple interest? A. Rs 18,000 B. Rs 19,102 C. Rs 6,000 D. Rs 12,000 2) What will be your real rate of return if your return on your investment is 9% and inflation is 5%? A. 9% B. 5% C. 4% D. 14% 3) By starting early you can have higher effect of power of compounding? A. True B. False 27

29 Quick Quiz 4) What is the effect on Purchasing power of money due to inflation? A. No Effect B. Decreasing effect C. Increasing effect D. Mixed effect 5) Which of these methods of computing interest yields higher return? A. Compound Interest B. Simple Interest C. Both methods yield same return D. None of the above 28

32 Franklin Templeton Asset Management (India) Pvt. Ltd. Indiabulls Finance Centre, Tower 2, 12 th and 13 th floor, Senapati Bapat Marg, Elphinstone (W) Mumbai Tel (91-22) Fax (91-22) Caveat (Arial Narrow 10pt.) 2014 Franklin Templeton Investments. All rights reserved. FTI PPT 4:3 01/14

Checking your Financial Health

Checking your Financial Health An Investor Education & Awareness Initiative By Franklin Templeton Mutual Fund Are you aware about your cash flows? i.e. Your cash inflows and outflows Are your finances