How to use lumpsum calculator

Lumpsum calculator is used to calculate growth of lumpsum investments over specified investment tenures. Lumpsum or one-time investment is investing the entire amount in one go. It is the oldest mode of investing and continues to be very popular with investors. 

How does a lumpsum calculator work?

Lumpsum calculators use the compounding principle to calculate returns or growth of 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:-

FV = I X (1 + r %) n

Where,

FV = Future Value of Investment

I = Investment Amount 

r = annualized return on investment 

n = investment tenure in years

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

Some lumpsum calculators can also calculate the growth of lumpsum investment in a mutual fund scheme over certain investment tenure. The formula used by such calculators is as follows (NAV refers to net asset value of the scheme on respective dates):-

Corpus = Investment Amount X {scheme NAV (end date) ÷ scheme NAV (start date)}

Different types of returns with lumpsum calculators

  • Absolute returns: Absolute return is the total growth in your investment expressed in percentage terms. Suppose you invested Rs 2 Lakhs in a mutual fund and after 2 years, the investment value is Rs 2.50 Lakhs – the absolute return will be 25%. 
  • Annualized returns: This is also known as Compounded Annual Growth Rate (CAGR). The effect of compounding (refer to the compounding formula above) is used in calculating CAGR. The formula of CAGR is as follows (you can get this formula by transposing the terms of the above equation):- 

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

Suppose you invested Rs 1 lakh in a mutual fund and got Rs 1.40 lakhs after 3 years – the CAGR will be 11.9%

    • Total Returns: Total return is the actual rate of return earned from the investment and includes both capital gains and dividends. Total return is important when you are comparing lumpsum returns of mutual funds with market benchmark returns. 
  • Point to point returns: It measures annualized returns between two points of time i.e. investment start date and end dates as chosen by you. You should note that point to point returns are biased by the choice of start and end dates i.e. market conditions prevailing in start and end dates. 
  • Trailing return: Trailing return is a variant of point to point returns, where the end date is today or the last business day and start date will be based on trailing returns period i.e. last 1 year, 3 years etc. Mutual funds usually show 1 year, 3 years, 5 years and since inception trailing returns in the fund factsheet. Investors should note that trailing returns, like point to point returns, biased by prevailing market conditions.

In this article, we have discussed the basic principles of how lumpsum calculator work and how you can use lumpsum calculators. Lumpsum calculators are easy to use and understand. You can use these calculators to plan your mutual fund investments.