Time Value of Money
Title of the project
Project Number 8
Student Name Shubham G Gupta
Registration
FIP11050
Number
Time Value of Money (TVM) is a fundamental concept in
finance that recognizes the principle that money's value
changes over time due to factors such as inflation, interest
Introduction
rates, and the opportunity cost of capital. In essence, money
available today has a different worth than the same amount of
money available in the future.
Briefly describe the
project work Gathered data from various website and from YouTube
Methodology channels.
adopted
TVM is a crucial concept for financial decision-making and
plays a vital role in areas such as investing, budgeting, loans,
and evaluating business projects. Understanding TVM
Conclusion or enables individuals and businesses to make informed
Recommendations financial choices that consider the impact of time on the value
of money. It allows for better comparisons between
investment options, helps in setting realistic financial goals,
and aids in making sound financial planning decisions.
Limitations (if any)
Part 1:
1.1) Identify the 5 most popular types of financial investment options
available for an investor to achieve his financial goal in the future.
There are various financial investment options available to investors that can help them
achieve their financial goals in the future. The popularity of these investment options may
vary based on individual preferences, risk tolerance, and financial objectives.
Here are five popular types of financial investment options:
Stocks: Investing in individual stocks or equity funds allows investors to become partial
owners of publicly traded companies. Stocks offer the potential for high returns over the long
term but come with higher volatility and risk. Investors can diversify their stock investments
across different sectors and geographies to reduce risk.
Bonds: Bonds are debt securities issued by governments, municipalities, or corporations.
When investors buy bonds, they are essentially lending money to the issuer in exchange for
regular interest payments and the return of the principal amount at maturity. Bonds are
considered less risky than stocks and can provide a stable source of income.
Mutual Funds: Mutual funds pool money from multiple investors to invest in a diversified
portfolio of stocks, bonds, or other securities. They are managed by professional fund
managers, making it easier for investors to access a diversified investment portfolio without
directly purchasing individual securities.
Real Estate: Investing in real estate involves buying properties for rental income or capital
appreciation. Real estate investments can provide a source of passive income and act as a
hedge against inflation. Real estate investment trusts (REITs) are also popular among
investors as they offer exposure to the real estate market without direct ownership of
properties.
Fixed Deposits and Savings Accounts: These are low-risk, low-return investment
options offered by banks. Fixed deposits provide a fixed interest rate for a specific term,
while savings accounts offer a lower but more accessible interest rate. They are suitable for
short-term savings and emergency fund
1.2) Guestimate the average rate of return generated by each of the
above listed instruments. and indicate the same in a tabular form.
Estimating the average rate of return for different financial instruments can be challenging as
it depends on various factors, including the time period, economic conditions, and the
specific assets or funds chosen within each category.
Here's a tabular representation of the estimated average rate of return for each financial
instrument.
Financial Instrument Estimated Average Rate of Return (Long-Term)*
Stocks 7% - 10% or more
Bonds 3% - 6% or more
Mutual Funds 6% - 8% or more
Real Estate 5% - 7% or more
Fixed Deposits/Savings
Accounts 2% - 4% or more
Part 2:
2.1) If
a sum of Rs.250000 is invested under each investment option for a
tenure of 5 years and 10 years respectively. Calculate what would be the
future value the investment. Present the future value of the investment
separately in a tabulated form for each investment type and tenure.
To calculate the future value of the investments, we'll use the future value formula
based on the compound interest calculation. The formula is:
FV=PV×(1+r)n
FV = Future Value of the investment
PV = Present Value (initial investment amount)
r = Annual interest rate (expressed as a decimal)
n = Number of periods (investment tenure)
Let's assume the annual interest rates for each investment type as follows:
Stocks: 8% (0.08)
Bonds: 5% (0.05)
Mutual Funds: 7% (0.07)
Real Estate: 6% (0.06)
Fixed Deposits/Savings Accounts: 4% (0.04)
By applying the above formula, the Future value of investment for 5 Yrs and 10 Yrs. are
tabulate below.
Future Value of Investment (Rs.) for 5-year Tenure:
Investment Type Future Value (5-year tenure)
Stocks Rs. 367,333
Bonds Rs. 319,070
Mutual Funds Rs. 350,638
Real Estate Rs. 334,558
Fixed Deposits/Savings
Accounts Rs. 304,162
Future Value of Investment (Rs.) for 10-year Tenure:
Investment Type Future Value (10-year tenure)
Stocks Rs. 539,731
Bonds Rs. 407,224
Mutual Funds Rs. 491,787
Real Estate Rs. 447,713
Fixed Deposits/Savings
Accounts Rs. 371,484
