What is Lumpsum Calculator

What is Lumpsum Calculator

Lumpsum investment, also known as one-time investments, refers to investing your entire amount in one go in mutual funds. It is one of the most popular forms of investment in India. A lumpsum calculator can be used to calculate point-to-point returns for lumpsum investments. As the name suggests, point-to-point returns measure annualized returns of lumpsum investments over specified investment tenures. 

Compounding effect 

In order to understand, how mutual fund lumpsum calculator works, we should know the concept of compounding. The term compounding is derived from the concept of compound interest. In compound interest, you get interested on not just the principal but also on the accrued interest. For example, if your principal is Rs 100 and the compound interest rate is 5%, then in the first year, you will get Rs 5 as interest. Next year, interest will be calculated on Rs 100 + 5 = Rs 105; so you will get Rs 5.25 as interest. Similarly in mutual fund investment, you can earn profits on profits re-invested in the scheme; this is known as compounding. The longer your investment tenure, the higher is the power of compounding and wealth creation. 

Compounded annual growth rate (CAGR)

CAGR is the acronym for a compounded annual growth rate of your investment. It is also known as annualized returns. The effect of compounding is used in calculating CAGR. The formula of CAGR is as follows:- 

CAGR = {(Final Investment Value ÷ Initial Investment) ^{(1 ÷ Tenure)}} – 1

Let us understand with the help of an example. Let us assume that you invested Rs 1 lakh in a mutual fund scheme. The market value of your investment grew to Rs 1.4 lakhs after 3 years. In that case:-

CAGR = {(1.4 ÷ 1) ^{(1 ÷ 3)}} – 1 = 11.9%

How lumpsum calculator works?

Lumpsum calculators use the compounding principle to calculate returns or growth of an investment. Compounding is profits earned on profits re-invested; if profits are re-invested, then you get higher profits and higher returns over long investment horizons. The compounding formula used by these calculators is as follows (you can get this formula by transposing the terms of the CAGR equation):-

FV = I X (1 + r %) ⁿ

Where,

FV = Future Value of Investment

I = Investment Amount 

r = CAGR 

n = investment tenure in years

Suppose you invested Rs 5 lakhs in mutual fund schemes. Let us assume that the schemes will give 10% annualized returns. Corpus accumulated by you after 10 years will be = 5 X (1 + 10 %) ¹⁰ = 12.97 lakhs. 

Points to note about the lumpsum calculator

• Lumpsum calculators can be very useful in financial planning. For example, if you need a certain corpus for your financial goals e.g. children’s education, buying a house etc, you can use a lumpsum calculator to estimate, how much you need to invest in lumpsum to meet your financial goal. 
• You should always use reasonable assumptions for CAGR or annualized returns in mutual fund lumpsum calculator. If you use a very high rate of return, which your mutual fund investment may not be able to generate you may fall short of your financial goals. 
• Different asset classes and mutual fund categories have different risk profiles. You should invest according to your risk appetite. Since risk and return are related, use CAGR assumption based on the risk profile of your scheme. Consult with your financial advisor if you need any help in understanding risk/return profile of your mutual fund schemes.