When you want to calculate your returns on investments, there are two ways of finding it. One is absolute return, and the other is compounded return. This article will tell you about both the returns and how you can calculate them with the use of the Compound Interest Calculator and Simple Interest Calculator.
What are simple returns and compounded returns?
A simple return can be referred to as the absolute return where there is no compounding of the return. So, for instance, if you invest Rs. 10000 today and after 5 years you receive Rs. 20000 so, the simple return (or absolute return) in this case would be 100%. So, every year, your investment went up by 20% as per simple return.
Now in the case of compounding returns, the return on your investment would be different. The return on your investment with the same rate of return every year that is 20% for 5 years, and the same investment that is Rs. 10000, at the end of the 5 years, you will receive Rs. 24884 instead of Rs. 20000. Are you wondering how all are the variables being same, yield different and higher return? The answer is the power of compounding. Yes, when your investment returns are compounded, the returns generated in a period are added to the actual investment for investment in the next period. This way, every period, your investment amount increases, and thus, the return on it eventually increases.
How to calculate simple returns and compounded returns?
The calculation of both simple and compound returns on your investment is quite easy. Let’s look at it one at a time.
Simple return calculation
So, if you want to calculate the simple or absolute return of your investment, you have to use the formulae given below.
Simple or Absolute return = {(FV-PV)/PV}*100.
Here,
FV = the future value or the value after maturity of the investment,
PV = your invested amount or the principal amount.
Now, if you take the example given in the above section, according to that;
FV = Rs. 20000
PV = Rs. 10000
So, absolute or simple return on your investments = {(Rs. 20000-Rs. 10000)/Rs. 10000}*100
= 100%
Now, this 100% is the return for all five years, using the Simple Interest Calculator you can find the yearly return, which will be 20% easily. So, every year, 20% will lead to 100% in five years.
Compound return calculation
For the calculating compound return, you need to do the following –
| Investment | Rate of return | Years | Value per period | Return | Total Value | ||
|---|---|---|---|---|---|---|---|
| 10000 | 20% | 1 | 10000 | 2000 | 12000 | ||
| 2 | 12000 | 2400 | 14400 | ||||
| 3 | 14400 | 2880 | 17280 | ||||
| 4 | 17280 | 3456 | 20736 | ||||
| 5 | 20736 | 4147.2 | 24883.2 | ||||
So, here as you can see, the initial investment is Rs. 10000, the rate of return is 20%, and tenure is 5 years as given in the first example. So, when the returns are compounded every year, that gets added, and finally, you get a higher return at the end of the tenure. Here, the return is compounded annually. If you compound the return quarter, the total value of your investment will go up further.
However, it is very tedious to calculate compound returns manually. It takes a lot of time. You can use the Compound Interest Calculator to find the return easily for any compounding frequency.
For instance, if the returns are compounded quarterly, you can find it with a second just by altering the compounding frequency to quarterly from yearly on the calculator. The total value of your investment will go up to Rs. Rs. 26533, while for monthly compounding, the return would be Rs. 26960.
This means that the higher the frequency of compounding, the higher the return. This happens as every period the investment amount increases, and thus the return goes up.
How and use investment return calculators and why?
Whether you use the Compound Interest Calculator or the Simple Interest Calculator, all you need to do is to enter the variables like the number of years for which you are investing, the rate of return which you are expecting, amount invested as the variables. Now you can change the frequency of compounding by using the different options given in the calculator, like quarterly, monthly, or yearly. You can also choose the frequency of your investment, whether ‘one time’ or ‘yearly’. The results would change according to the set of variables you have chosen.
The reason behind using these calculators can be ease of use, they save a lot of time, and energy, offer accurate results in no time, and you can compare different investments in little time by finding out the effective return of every investment option and a lot more.
Wrapping up
So, the next time you are calculating the return on your investment, know which return you want to calculate. If you want to find the absolute return, you can use the Simple Interest Calculator and if you want to calculate the compound return of the investment, then you can use the Compound Interest Calculator.