Returns vs Yield:
Sachin have invested Rs.1,00,000(1 Lac) in mutual fund before 5 years.if suppose today its value is 1,50,000.Then what are the returns and what is the yield.
We can calculate it in following way:
Return of the scheme using CAGR formula: 1,50,000 = 1,00,000 (1 + i)^ (1/5)
Then i= 8.50% —————Real returns.
Yield of the scheme = Total interest or Gain earned/Period
=50,000/5
=Rs.10,000
= 10% for investment of Rs.1 Lac. ——-Avg annual returns.
There is no common benchmark for all schemes to offer returns.So one can tell that it have offered 8.5% or one can say that it offered 10%.Its responsibility of the investor to know whether returns shown are CAGR or yield of the scheme.
Effect of inflation on your saving:
Rahul is of 30 Yrs age and he will retire at age of 60 yrs.
He want to retire with a corpus equivalent of todays Rs25 Lac .Considering expected returns of 10% and different rate of inflation we will calculate the amount he need to save per month and projected value of todays 25 lac after 30 yrs.Its shown in tabular form below.
| Age | Age at retirement | Assumed Return on investment | Rate of inflation | Per month saving required. | Projected Value of Rs.25Lac after 30 Yrs |
| 30 | 60 | 10% | 7 | 9,225 | 1,90,30,600 |
| 30 | 60 | 10% | 8 | 12,195 | 2,51,30,000 |
| 30 | 60 | 10% | 9 | 16,079 | 3,31,69,000 |
| 30 | 60 | 10% | 10 | 21,147 | 4,36,23,000 |
Only variable in above calculation is rate of inflation.Even 1% of increase in inflation rate changes per month saving required and projected retirement corpus.
With increase in inflation our spending increases.Its not necessary our earnings will grow in same proportion.so start saving money today and retirement planning today.
