To start with, we need to understand the concept of maturity amount before making any calculations in an Investment Plan. It is the amount which is paid to the investor at the maturity date (end of investment plan). There can be different types of Investment Plans, such as investment in Bonds, Certificates of Deposits etc. You should compare investment plans and select the best one keeping in mind some factors like investment period, rate, maturity amount etc. For this, you should be able to calculate the maturity amount to compare investment plans.
Calculation of Maturity Value in an Investment with Annual Compound Interest
First Step: Firstly, collect all the information, which you need to calculate the maturity value and it includes the present value or starting amount of the investment, interest rate, time period that will be covered by the calculation. In case interest is paid more than once in a year, make a note of this thing.
Second Step: Convert your interest rate into the decimal format by dividing the interest rate by 100. For an instance, if the interest rate in your investment plan is 5%, it will become 0.05 after getting converted to decimal format. Now, add 1 to it for creating an Interest multiplier value. In the case of the interest rate of 5%, the interest multiplier value will be 1.05. Let’s take another example of interest for more clarification: if the interest rate is 12.5%, the interest multiplier value will come out to be 1.125. This multiplier will help you to calculate the total of principal and interest if you multiply it with the principal amount. To compare investment plans, compare their interest rates and calculate the multiplier value accordingly.
Third Step: Multiply the present value multiplier calculated in the second step with the present value of the investment for the first year of your investment plan. For example, an investment of INR 1,000 with an interest rate of 5% will generate a total of INR1050 in the first year.
Fourth Step:: The interest multiplier again for compounding the first year interest with the present value should multiply the total of the first year. If we take the same example of the initial investment of INR 1,000 with an interest rate of 5%, the investment will become INR 1102.50 after the second year. Repeating this calculation for each year as per different investment plans will lead to the maturity amount.
Calculation of Maturity Value in an Investment with Other Compounding Periods
First Step: First of all, you need to convert the number of periods into a value which will match your compounding period. If your investment plan is for 5 years and interest is compounded monthly, it will have a time period of value 60.
Second Step: After calculation of the periods, you need to divide the interest rate of your investment plans by the number of compounding periods in a year. For an instance, if the interest rate of 5% annually will equal to 0.417 if compounded monthly and it will be 1.25% if compounded quarterly. Apply the same procedure, which is adding 1 to the decimal format of this interest rate for calculating the interest multiplier.
Third Step: To proceed further in calculating the maturity value of different investment plans and to compare investment plans follow the steps of section one,
Investment plans are something creates wealth for future, which makes choosing appropriate investment plans wisely by comparing investment plans keeping in mind certain factors such as investment plans quotes, period, maturity value etc. Additionally, you need to carefully research about different investment plans if you seriously looking for stepping into investment.