Time Value of Money– By Prof. Simply Simple• Some people put their money ina bank account; some makeinvestments in stocks and bonds.• Different people follow differentstrategies to keep their moneyon the move.• All of them consciously orunconsciously realize time is thebiggest enemy of idle money.• So, the concept of time value ofmoney always influences ourdecision about what we intend todo with our money.
• But what makes a rupee inour hands today worth morethan a rupee tomorrow?• What is so different aboutcurrencies made of paperthat the value of the sameamount of money diminisheswith time?
Well…• You need not be a philosopher to understandthe concept of time value of money.• A Rs. 100 note today in our pocket is worthmore than a Rs. 100 note that we may getafter five years. All of us intuitively know that.• But let’s try to understand what actually makesthe present value of money worth more thanthe value of the same amount of money afterfive years.
Remember…• Money is just another name for newopportunities.• The money that you have now can openthe doors for many opportunities. Differentuses of money may have differentadvantages.• Some of these opportunities may look verysmall but some of them might really putyou on the fastest track to the future.
Here’s a new term for youto know!• If you invest your money now, you would earn areturn which would make your money grow in thenext five years.• But the problem is you can choose only one ofthe many equally advantageous opportunities. Allof us try to use our money for the best possibleopportunity.• The advantage that we forego by not putting ourmoney in another possible opportunity is what iscalled the Opportunity Cost of Money.
For example…• So, if you are investing your money in a 10-year bondthat pays you 10% interest, then you are foregoing anopportunity of putting the same money in a 10-yearterm deposit that pays you 8% interest.• In this case, your actual advantage is only the 2percentage points more interest that you earn onyour investment in bonds.• But always remember that different opportunitieshave different risks. Investment in bonds may beriskier than investment in term deposits.• So you should always compare the risk-adjustedreturn to find out whether you are gaining or losing inmaking a particular use of money.
It is better to eat yourbreakfast beforeinflation eats yourmoney!• Today you can buy four pastries forRs100, but maybe after five years youwould be able to buy only two.• So you have to think - if I give you anoption of either taking four pastriestoday or two pastries after five years,which option would you choose?
How can you use the concept of timevalue of money to make intelligentdecisions about your money?• The first thing you must keep in mind is that youshould never keep your present money idle.• Money has to grow with time. Invest it in stocksor bonds so that the return is good enough to atleast preserve its present value.• And still better, take the mutual funds route totake advantage of professional fundmanagement services.
• If you invest Rs. 1 lakh now, whatshould its worth be after 30 years ifyou are earning 10% return per annumcompounded annually?• For your knowledge, let me tell youthat Rs. 1 lakh would be worth Rs.17.45 lakh after 30 years.To SumUp
To SumUp• The concept of time value of moneysays that the value of money atpresent is worth more than the sameamount of money in the future.• By making appropriate investmentdecisions, we can make money growwith the passage of time.
Hope you have now understood the concept ofTime Value of MoneyIn case of any query, please email@example.com
The views expressed in these lessons are for informationpurposes only and do not construe to be of any investment,legal or taxation advice. They are not indicative of futuremarket trends, nor is Tata Asset Management Ltd.attempting to predict the same. Reprinting any part of thispresentation will be at your own risk and Tata AssetManagement Ltd. will not be liable for the consequences ofany such action.DisclaimerMutual Fund investments are subject to market risks,read all scheme related documents carefully.