time value of money & when to start investing · pdf filefor internal use only / not for...

For Internal Use Only / Not for Distribution to the Public

Time Value of Money & When to Start Investing

An Investor Education & Awareness Initiative By Franklin Templeton Mutual Fund


© 2014 Franklin Templeton Investments. All rights reserved.

The dream home...

which was worth Rs 50 lac

few years ago…

costs Rs 1 crore today.

Why?

1



2

Time Value of Money



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



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



You will be at an advantage by taking

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.



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


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

Simple Interest

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Simple Interest: Principal X Rate X Number of Years

100



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.


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 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


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



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?


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



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


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



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?


• 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


Earning interest on interest refers to Power of Compounding

Power Of Compounding

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Longer your time horizon Higher the effect of

Power of Compounding


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

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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





Impact Of Delay

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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


Cost Of Delay

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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


Points To Remember

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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


Points To Remember

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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


we now invite you to test your learning by taking up this simple quiz

(and win exciting prizes!)

Lets Do A Short Quiz!

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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

Quick Quiz

27


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

Quick Quiz

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Thank You For Participating!

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Mutual Fund Investments Are Subject

To Market Risks, Read All Scheme

Related Documents Carefully.

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FTI PPT 4:3 01/14

Franklin Templeton Asset Management (India) Pvt. Ltd.

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12th and 13th floor, Senapati Bapat Marg,

Elphinstone (W)

Mumbai 400013

Tel (91-22) 6751 9100

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www.franklintempletonindia.com

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