Is the fancy financial jargon driving you up the wall? Here are 5 financial terms you will hear repeatedly that will muddle you up, especially if you have recently started investing. Here’s a handy guide to sail you through.
Compound Interest – Simply put, the method of compound interest refers to earning interest on previously earned interest by continually reinvesting the earned interest, making your investments grow exponentially.
For example, you have INR 100 that you invest at a rate of 10% per annum for 5 years. Simple interest on the amount would only be INR 50 in 5 years.
However, in the same example, if you calculate interest on a compounded basis, at the end of the first year you would have a total of INR 110. By the end of the second year, the amount would grow to INR 121. In this manner, the total amount at the end of 5 years would be INR 161.05.
Capital Growth – This term is exactly what you are looking for in your investments. Capital growth refers to the increase in the value of an asset over time. It is calculated by taking into account the market value of the asset and the amount paid to originally buy the asset.
IPO – An IPO refers to Initial Public Offering, which is a method by which a company can raise capital by selling its stocks to public. The issuer (that is the company offering the shares) is not obliged to repay the capital to the public investing in its stocks.
Mutual Fund – A mutual fund can be described as an investment scheme, managed professionally by an asset management company. The fund creates a pool of people and invests their money in equity and other securities. Mutual funds are very popular with small investors as it gives them the opportunity to invest in professionally managed well-diversified portfolios.
Risk – All investors will come across this one on a daily basis. Risk, in the simplest of terms, is the uncertainty in variation of expected returns. The amount of risk an investor is willing to take simply measures the level of uncertainty in realizing the expected income from an investment. Thus, investors are always recommended to invest on the basis of their risk appetite in well-diversified portfolios to minimize the risk by spreading it across instruments.
Now that you are armed with the basic financial lingo, we recommend you start investing now to meet your financial goals successfully.