Smartest investment and life plans in UAE

Mutual fund Calculator

By PolicyBazaar
  | Published: 12 January 2021 | Last Updated On: 22 January 2021

Invest smart today for a better tomorrow

Average Rating / 5 (ratings ) | 287 Views

Smartest investment and life plans in UAE

By Clicking on "Proceed", I declare that I am a resident of UAE and holding a valid Visa and agree to the website Privacy Policy and Terms of Use.

When one thinks of investing, mutual funds pop up usually as their first thought. When investing in mutual funds, there are a lot of questions that take over your mind. It is normal to be curious about what is the right amount to invest, how much money can you earn as returns from your investments, so on and so forth. 

The easiest answer to all your mutual fund related questions is a mutual fund calculator. It will help you evaluate the future valuation of your lumpsum investment today. The calculator is easy to use and can help you get answers about your mutual fund investments in an instant. This will help you decide whether you want to continue or switch to another scheme if it is not yielding the returns you seek. 

Let us start with understanding mutual funds and the mutual fund calculator in a little detail: 

What are mutual funds?

Mutual funds are professionally handled investment schemes. They are run by asset management companies that act as a mediator for all retail investors. This asset management company or AMC collects money from several different investors and uses this pool of money to invest in bonds, equity shares, money market instruments or other kinds of securities. In proportion to the investment made by each of the investors, they are allotted a specific number of units. As a result, the investor is called a unitholder. This unitholder has a share in the income, profits, losses as well as the expenses of the fund that is in proportion to the investment they have made in the fund. 

What is a mutual fund calculator?

People often get scared of investing in mutual funds, thinking they are very complicated. But that is not the case. One can easily learn the nitty gritty details of investing in mutual funds by anyone interested in growing their investments. A mutual fund calculator is a tool that guides the investors through the maze of investing in mutual funds with the help of its advanced algorithm that calculates results on what to expect as returns on investments along with other necessary details. 

The calculator can be used by everyone, that too for free from the comfort of their home as everything is available online. Mutual fund calculator guides one in making the right investment decisions depending upon the financial and investment goals of the investor. 

How to use a Mutual fund calculator?

Manually computing the returns earned on mutual funds at different rates of interest is certainly complicated. This could be especially difficult for someone who has no financial education or dreads complex calculations. A MF calculator performs these intricate calculations for you in just a second, making investments easy. The mutual fund calculator generates results without any personal biases or hidden motives, thus providing accurate data that helps investors make wise decisions regarding their finances. 

As stated earlier, using the calculator is extremely easy, all you need is to put in the required information like: 

  • The lumpsum amount -Use this option when you have a sum that you know you will not be needing in the near future.
  • The type of funds like equity or debt etc
  • The number of years you want to invest
  • The expected rate of return annually

Now the mutual fund calculator will calculate the returns of your investment. These calculators calculate the returns in a number of different ways as discussed below: 

  1. Absolute Return- This is the calculation of returns on the lumpsum mutual fund investment made in absolute terms. To put it simply, it is the amount of money made from your investment. For instance, if someone invests an amount of AED 10,000 in a certain mutual fund for a period of 1 year, at the end of the term its value is AED 11,000. This means they got an absolute return of AED 1,000 or 10 percent. The formula for calculating the absolute returns is as following:

Absolute Return= (Current Value - Initial Value)/ Initial Value * 100 

  1. Compounded Annual Growth Rate- This is another way to calculate your returns if the investment is held for more than a period of 1 year. As the name suggests, the compounded annual growth rate or CAGR works along the same principles of compound interest. It calculates the returns across many years and averages them out so as to provide you with a single figure that can be used to ascertain the kind of returns one can get from their investments. This is done because of the assumption that the profits made from mutual fund investments are invested again each year, thus compounding the value of the initial investment amount. The formula for calculating CAGR is:

CAGR= [(Final Value/ Initial Value) ^ (1/N)] - 1

Where, Final Value= The value on the day of redemption

Initial Value= The investment amount

N= Investment tenure in years

Here is an example to explain how CAGR works:

If for instance someone invests an amount of AED 10,000 for a period of 5 years in mutual funds, they will get AED 20,000. Using the formula for calculating CAGR, the mutual fund calculator will work as following:

CAGR= [(20000/ 10000) ^ (1/ 5)] - 1

          = 14.87 %

  1. Internal Rate of Return- The two above-mentioned methods work efficiently when      someone invests a lumpsum amount for a fixed time period and want to evaluate the sum it will make as returns for a specific time interval. But what about those who consistently invest over different intervals? For instance, investing in a SIP or Systematic Investment Plan that requires investment of a certain sum of money monthly. How then does a mutual fund calculator estimate the returns?

In that case, the calculator uses a complicated method of internal rate of return or IRR. This method can be applied over the Excel sheet using the function of XIRR. The aggregates CAGRs over separate time intervals will give a single rate of return for all the investments. 

Benefits of using the Mutual Fund Calculator: 

  • Easy to use- One does not have to make complicated calculations to find out the amount they are making as returns. The mutual fund calculator does all that for you and you don’t even require any advanced knowledge about investment or finances.
  • Gives accurate information- Using the calculator gives you an accurate picture of the investments made allowing you to make your decisions smartly. Its advanced algorithm never fails to offer accurate data.
  • Allows comparisons- The MF calculator lets you make comparisons between mutual funds in the same class. It allows you to estimate the returns from your mutual fund as opposed to another scheme in the same category.
  • Efficient- The calculator is available online and can be accessed any time by anyone looking to invest in mutual funds, to check the returns from their investments. The results from the complex calculations are offered within seconds, giving it an added advantage.
  • No need for Agents- Using the calculator removes the need to consult agents or distributors to calculate your returns.
  • Helping hand- It works as a free guide that helps investors to make well-informed decisions on their mutual fund investments.
  • Provides encouragement- Using a mutual fund calculator will not only help you in making appropriate financial decisions, it also enhances your knowledge about different schemes, their rate of return etc. All this encourages investors to invest and grow their funds wisely. 

The Bottom Line

The market is full of mutual funds that can prove to be confusing for someone who wants to pick one to invest in. Similarly, there are a lot of asset management companies and it can be hard to find the one that is best for you. Before making decisions about choosing a mutual fund from a certain class, one has to evaluate the risk perception as well as the expected returns. These decisions will be made a lot easier if you simply use a mutual fund calculator.