Future Value: Predicting Wealth
Future Value (FV) estimates how much an investment made today will be worth in the future, assuming a fixed rate of return. It is the core calculation behind almost every financial product, from Fixed Deposits to Mutual Funds projections.
How Compounding Works
Compounding is "interest on interest". In the first year, you earn interest on your principal. In the second year, you earn interest on (Principal + Year 1 Interest). This snowball effect causes wealth to grow exponentially, not linearly.
- Linear Growth: Saving ₹1 Lakh under a mattress for 10 years = ₹1 Lakh.
- Exponential Growth: Investing ₹1 Lakh at 10% for 10 years = ₹2.59 Lakhs.
The Rule of 72
A quick mental shortcut to estimate doubling time. Divide 72 by your interest rate.
- At 6% (FD): 72 / 6 = 12 Years to double money.
- At 12% (Mutual Fund): 72 / 12 = 6 Years to double money.
FV Formula
FV = PV × (1 + r)^n
If you add regular contributions (PMT), the formula expands to include the Future Value of an Annuity.
Common Returns to Use
- Savings Account: 3%
- Fixed Deposit (FD): 6-7%
- Gold: 8%
- Equity Mutual Funds: 12%
Tax Implications on Future Value
The number you see on the screen is "Pre-Tax". In India, different assets are taxed differently:
- FDs: Taxed at slab rate (up to 30%). Real FV is much lower.
- Equity (Shares/MFs): Long Term Capital Gains (LTCG) taxed at 12.5% for profits above ₹1.25 Lakhs.
- PPF: Exempt-Exempt-Exempt (EEE). The FV you see is the FV you get.
Always adjust your target FV by deducting roughly 10-15% for taxes.
Inflation Adjustment
To see the "Purchasing Power" FV, subtract inflation from your expected return. If you expect 12% return and 6% inflation, use 6% in the Interest Rate field. This gives you the FV in "Today's Money".
FAQs
- Is this accurate for stocks?
- No. The stock market is volatile and does not give a fixed return every year. FV assumes a constant linear CAGR, which is a theoretical average.
- What about taxes?
- This calculator shows pre-tax wealth. You must account for Capital Gains Tax (LTCG: 12.5% for equity > ₹1.25L profit) to find the net take-home amount.
- PMT Meaning?
- PMT stands for Periodic Payment. In this calculator, it refers to the 'Annual Contribution' you make effectively acting as a SIP.