When it is about achieving short-term financial goals, finding the best investment plan for 1 year, 3 years, and 5 years becomes critical. Not only this, but after the first year, you would want your money to compound. The thing with compound interest is that the interest you earn over time is computed and then added to your initial account balance. So, in the next compound period, your interest will be computed on the total of your principal investment plus the interest amount you previously accumulated.
You need to select an investment avenue If you want to invest your savings and earn returns over it. You can invest your money in investment options like fixed deposits, mutual funds, etc. But first, you need to understand how compounding works, as that will help you make smarter decisions. And with a reliable investment calculator, it will be even easier for you to visualize your potential returns.
What is Compound Interest?
Compound interest is the interest calculated on the principal amount as well as the interest earned from the previous period. On the other hand, simple interest is only calculated on the initial investment and doesn’t take into account the interest earned from the previous period. Compound interest accelerates growth over a period of time.
Not only this, if you are looking for the best investment plans for 1 year, you can consider plans compounding every month or every quarter.
Why Compound Interest Matters in Short-Term Investing?
While compounding is more powerful if an investment is kept for a longer tenure. But, it is equally relevant for achieving your short term goals as well. For instance, if you are looking for the best investment plans for 1 year, choosing an option that compounds frequently can help you make the most of your money in a limited period of time.
Let’s say you invest ₹1,00,000 in an investment option that offers 8% interest p.a. compounded monthly. At the end of the year, you would earn more than you would with a simple interest investment option. The difference might seem small, but when you repeat this investment process or do it at scale, it will add up significantly.
Table of Contents
Compound Interest Formula
This formula is used to compute the compound interest of any investment option –
A = P(1+r/n)^(nt)
As you already know, here
- A is the future value of your investment or maturity amount
- P is your principal investment amount
- r is the annual interest rate (expressed in decimal)
- t is the number of years for which you intend to invest the money
- n is the number of compounding periods per year
Example of Compound Interest Investment
Suppose Geeta invests Rs.10,00,000 for 1 year to earn an interest of 8.5% on her investment compounded quarterly. Let’s calculate the returns on her investment using the compound interest formula –
- P = 1000
- r = 8.5% = 8.5/100 = 0.85
- t = 1
- n = 4
A = P(1+r/n)^(nt)
A = 1000000(1+0.85/4)^(4*1)
A = ₹ 10,87,748
Using the formula, we can estimate that by the end of 1 year, Geeta will receive Rs. 10,87,748 as the maturity amount.
How Online Investment Calculator Can Assist You?
By now you have understood that an investment calculator is vital for those looking to determine how to maximize their savings and make the most of their investments. Here’s how the online financial tool can help you –
- Accurate estimation
Investment calculators can help you find out how much your savings or principal investment could grow over some time. Notably, the tool will factor in variables such as principal, rate of interest, and frequency of compounding.
- Proper financial planning
Online tools like the investment calculator can help you plan your finances and investments better. It can help you to tweak your investments to understand how to achieve your financial goals better. By helping you estimate how much money you could accumulate, the tool can help you build a suitable retirement plan, emergency corpus, or financial fund.
- Effective comparison
You can use the tool to compare the different investment options. If you are not happy with the outcome, you can tweak the variables to understand how the change would reflect your final amount. This way, you can pick the best-suited combination.
- Understanding the impact of compounding
While you know compounding can help you accumulate corpus significantly, this tool will show you how exactly it grows. You can readjust your principal amount and tenure to see how they impact your corpus and its growth.
- Budgeting
Investment calculators can help you with budgeting and savings strategies. It can help you understand how different monthly contributions can impact your savings. Based on the outcome, you can decide which strategy would work best for you and plan to pursue it accordingly.
How to Use an Investment Calculator to Plan Smartly?
Follow these steps to use an online investment calculator and determine your returns on investment –
Step 1 – Look up a reliable investment calculator online.
Step 2 – Enter required details such as investment amount, tenure, interest rate, compounding frequency, and other essential details.
Step 3—After all the details are entered, the tool will display the final amount and total interest accrued. The tool can be used for free and allows you to readjust the variables multiple times. You can tweak variables like principal amount, duration, or frequency of compounding to check and compare the impact of different combinations.
Final Thoughts
Whether you are a risk taking investor or a conservative one, compounding can help you achieve higher returns and make the most out of your money, even in the short term. The key is to opt for the right investment option and use an investment calculator to estimate your returns and compare with different investment plans available in the market.