November 8, 2009

How do you compute for interest earned on incremental investments

Filed under: Money — HarryCool @ 4:15 am

I have this investment plan where I put 10K every year in an equity linked deposit with my bank. This has been running for last 6 years. If I take the difference of what I have today in that deposit and what I have invested so far, it will not show me my earnings accurately. This is because I did not invest all the money at the same time 6 years ago. If I need to look at my earnings per year (in %), I need to look at each 10K with the amount of time I have invested that 10K for.

eg If at the close of 1st year, I had 11000 in my deposit, that would mean I was earning 10% per annum on my investment. However, at the close of 2nd year (after having invested an additional 10K for an year) if my balance in my account stands at 21000, that does not mean that I am earning 2.5% per annum. This is because I should not divide (1000-profit) / (20000-principal x 2-years). And this in turn is because my 2nd 10000 was invested only for one year whereas my first 10000 was invested for 2 years. I need to weight out the term of each deposit.

How do I do this in excel for a number of running years. This is how – Click

So the real yearly interest earned after the first two years would be 3.23% and not 2.5%.

Does this way sound right?….

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