All those ultra-high net worth individuals out there are involved with the stock market and mutual funds in some way. Some people went on from driving a corolla to riding in a private jet only with help of stocks and mutual funds. Many people who start investing in markets use calculators to check the growth of stocks or mutual funds but very few know the logic and concept behind them which is very important for any investor to understand to make big in the market.
When you are using a growth calculator for stock it just needs the name of the stock and displays you the returns but in reality, those returns can be deceptive. When a calculator shows one year return it means that how much has the price changed from the last 1 year. So, if the stock price of ABC company was 100$ on April 1 last year and it was 112$ on the same date this year then it is said to have given a 12 % return but this approach does not take into consideration the fluctuations of the shorter period like the stock price may have gone up to 140 in some month giving 40 % return but later came down due to some reason.
Mutual funds are managed by professional people who have extensive knowledge of markets. So, when you invest in mutual funds you are not investing in a company but placing your money into the hands of a professional to invest in a group of companies. Now when you are calculating the growth of mutual funds it is more complicated than stocks because the fund may have invested in multiple companies and each company showed different growth. So absolute return can be calculated using finding the percentage of growth in the amount invested by the fund. Like if the fund invested 1 million in different companies and after the one-year total value of the portfolio was 1.2 million then the return is 20%.
Most of the time new investors tend to overlook inflation which brings down the actual growth of stock or mutual funds. Inflation means a rise in the price of daily goods like if inflation is 6 % then essentials have become 6% expensive in the last year. So if your growth of Stock or mutual fund was 10% then actual growth if wealth was just 4%. For example, you invested 100$ in stock and after a year it has grown 10 % to 110$ but at the same time last year price of milk was 100$ and it is now 106$, increasing 6% in the time, so now your actual gain in wealth was not 10$ because you are paying 6 extra for an essential so only 4$ were gained by you. Investors who understand this factor can pick better stocks and increase their wealth by a higher percentage.
Mutual funds and stocks are not as complicated as people make them be. If you know basic mathematical concepts and follow a logical approach then you could do good in the market. Calculators are a great way to decide on your investments but you should know the concept behind them or the output they show is useless because just because a calculator shows a 30% return doesn’t mean your money will increase by 30%. So, invest carefully and learn the mechanism beforehand.