In the modern financial landscape, you can make money in two ways. The first option is to work for a living, either for yourself or for another organisation. Another strategy to create wealth is to invest your earnings to increase their value with time. The goal is to create cash, whether you choose to put your money in bonds, mutual funds, stocks or other such financial instruments.
So, how do you determine where you should put your money? An investment calculator is a tool designed to aid this decision-making process.
An investment calculator assists a person in estimating the length of time that their investment will remain functional. You can also figure out how much money you have saved and how long you want to invest it. So, whether you’ve just begun investing or have been investing for a while, an investment calculator can help you figure out how to achieve your objectives.
Most of the investment calculators display an individual’s starting balance, contribution frequency, and risk tolerance. These elements have an impact on the growth of one’s money when it is invested.
Let’s understand how they work and why you should use an investment calculator to determine these variables.
1. Understanding Where to Start
Assume you have some money set aside, maybe you recently received a bonus at work, or you received money as a gift or inheritance. This amount could be used as a starting point for when you go for the best investment options in India. The initial balance or the principal sum is your starting point for investment purposes. Depending on the investment plan that you opt for, the minimum balance required may differ.
For instance, if you are going for ULIP, an investment-cum-insurance tool, you can use a ULIP calculator to determine the portions required for both purposes effectively.
2. Evaluating Your Risk Tolerance
An individual’s risk profile is a measurement of their willingness and capability to accept risks. It can also relate to the dangers to which a company is subjected. Understanding your risk profile is necessary to define the asset allocation of a sound investment portfolio. This is used by businesses to reduce potential risks and dangers.
Notably, risk and return are two sides of the same coin in investing. When you opt for minimal risk, it usually means lower predicted returns, whereas larger returns usually mean higher risk. When using the investment calculator, you can ascertain the details of your investment depending on your risk tolerance.
3. Determining the Regular Contributions
Your contribution is the amount you put into your investment regularly. After you have chosen your initial investment amount, you will probably want to keep adding to it. People keen on saving may wish to make significant expenditure cuts to invest as much as possible. On the other hand, if you are saving casually, you may choose a smaller contribution amount.
You also have the option to choose how often you want to contribute, which you can see when using the investment calculator. Some people have their investments withdrawn from their pay automatically. This might involve monthly, half-yearly or yearly contributions, depending on your choice.
3. Estimating the Rate of Return
Using the investment calculator will allow you to project the rate of return, depending on your starting balance, contribution amount and frequency. If it is a market-linked product such as ULIP, you must be mindful of your risk tolerance when choosing the investment funds. It will directly impact the rate of return on your money. Hence, using the ULIP calculator may be a wise idea.
However, remember that even when you are using the ULIP calculator or any other investment calculator, you must have realistic expectations to avoid any disappointments in the future.
4. Giving the Investment a Time Frame
The last element to consider when using the investment calculator is the length of time you plan to invest. Consider how many years you think it will be before you can access your funds. The longer you wait to invest, the more time you will have to benefit from it. That is why, rather than waiting until later in life, it is critical to begin investing early in your career.
An investment calculator helps you manage your finances in more ways than one. You can also calculate your taxes from your investment portfolio more accurately. The quick and convenient assessment of your investment plans helps you choose the right instruments and keep other financial aspects of life in order. Hence, make sure you put careful thought into it before making investment decisions.