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How to Know the Future Value of Your Monthly Investments

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Money has both present value and future value. I will articulate this concept by discussing a situation. Assume that you are in the business of lending money. If you lend somebody a million dollar for duration of five years, would you expect the person to return the same amount or want him to pay back an amount that compensates you for the sacrifice you made?

The amount of money that the other person agrees to pay you back after five years is the future value of your money. Likewise, when you invest a dollar in fixed deposit you expect that when the tenure of the fixed deposit expires you are paid back an amount that is more than you invested. What you get back after the expiry of the tenure of the fixed deposit is the future value of money.

You would be wondering how to determine the future value of the money that you invest. The future value depends on how much you invest today, for how long you invest and the Risk that you take by making the investment. While the time duration of investment and the amount of investment plan are quantifiable variables but quantifying risk is not all that easy. However, we will not get into the intricacies of the quantifying risk. All that we need to know here is that higher the risk related to the investment, higher is the return you can expect on your money.

Let us take an example to understand the future value of monthly investments that you would be expected to make in a mutual fund. Assume that we need to compute the future value of monthly investments of INR 1000 over a period of 20 years in a mutual fund that commits to pay 0.75 percent monthly rate of return. The instalments are payable at the beginning of each month.

Monthly investments made over a period of 20 years means that you need to pay 240 (20 * 12) monthly instalments. Each instalment that you pay generates a monthly return of 0.5 percent. The first instalment that you pay would be compounded over a period of 240 months and the return on last instalment will be compounded for just 1 month. Thus, by applying the formula of compounding the future value of the first instalment would be FV1