5 Investment Terms Everyone Should Know

Fiancnial Goals [Autosaved]1.png

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.

Advertisements

Unleash the magic of compounding

Would you ever believe if someone tells you that money can grow magically! Compound interest is a magical phenomenon that can turn few thousand rupees into lakhs and crores, over a period of time, if left undisturbed.

It is a powerful concept that can help one achieve financial goals – retire comfortably, take a world cruise, buy a house or just be a millionaire!

So how do you use compounding to help you achieve your financial goals?

The magic of compounding is a powerful tool in the hands of disciplined and regular investors. It teaches us a simple lesson – you don’t have to save a lot if you save regularly for a long period of time.

compound-interest-1296451_1280

It takes time to accumulate wealth, and compounding does not work overnight. It is not only about how much you save, wealth creation also depends on how long you save. STARTING EARLY is the first step towards creating a life of your dreams.

Let’s take a situation to understand this better. Sam started saving early in life on the advice of his wealthy uncle. He started small, but young. At the age of 23 years, he began investing INR 3,000 per month through SIP. At the age of 33 years (with an effective return of 11%), he has a portfolio of over INR 6,30,000.

On the other hand, his friend Jack started saving quite late. At 28 years of age, he began investing INR 6,000 in the same portfolio as Sam through SIP. At the age of 33 years (with an effective return of 11%), Jack has a corpus of about INR 4,74,000.

Even though Sam and Jack invested the same amount of money in principle, Sam made smaller monthly investments over a longer period of time, leading to a much bigger corpus.

The rule of 72 – Do you want to know how long it would take for your money to double? Use the rule of 72. For example, if your investment earns 9% interest, then it would take 8 years (72 divided 9) to double. You can easily use this formula to calculate how long you need to keep your savings locked in to let compounding work its powerful magic.

Mutual funds are the only way to create large portfolios by saving small (but steady). The SIP (Systematic Investment Plan) option allows you to invest as low as INR 1,000 in a mutual fund each month. Over a long period of time, these small yet continual savings lead to big portfolios due to the power of compounding.

Reap into the benefit of compounding now, and unleash its power by coupling up with a smart SIP investment strategy. Dr. Celso at Navemarg can help you plan your investments to meet your financial goals effectively.

Choosing the right fund to invest

Selecting a fund in hindsight is easy, as anyone investing in top funds for the past few years (such as HDFC 200, Franklin Templeton, DSP) would agree. Many investors reaped over 20% returns in the past few years and those who look back, only wish they had chosen the right funds.

While hindsight is definitely a gift, it is not one to rely on for future investment. Many investors make the folly of solely relying on the past performance of funds to make an investment decision. However, what you need is an overview of various factors such as past performance, CRISIL ranking, fund house reputation, portfolio diversification and expense ratio.

question

Choosing a fund becomes important when you have a long-term investment horizon in mind. If you plan to stay invested for 8-10 years, investing in an equity fund is a wise option. Here are some tips to choose the best fund for your requirements:

  1. How is your money invested – When you choose a fund to invest in, check what are you looking for – debt, equity or money market? Once you choose the type of fund, it is imperative to check how the money is going to be invested. A well diversified portfolio is key to good returns.
  2. Key information document – Read your key information document and scheme information document well. It contains all the information about the scheme as well as about the fund house. The reputation and approach of the fund house is very important to understand, as you are mandating it to invest your money on your behalf. It is important to know the team managing your funds. Are they seasoned investors who will manage your money well?
  3. Expenses – Even though all funds in India come without a sales cost (no load funds), asset management fee and brokerage fee is often ignored while selecting a fund. Funds with lower portfolio turnover ratio have lesser costs associated with them. Secondly, look for funds that charge lower asset management fee. You will find many well-performing funds charging less than 2% per annum.
  4. Fund performance – When checking for fund performance, look for consistency and not volatility in returns. For equity funds, it is a good idea to check returns over a 3-5 year period, benchmarked against an index and other funds in the category.
  5. Consistent investments – When you start investing in a mutual fund, stop thinking of it as a liquid amount for at least 8-10 years. Make consistent payments and let the magic of compounding work over a period of minimum 8-10 years. Starting an SIP to invest in mutual funds or ELSS can be a good way to achieve discipline in your investments.

It is important to plan your investments well. At Navemarg, Dr. Celso can guide you to achieve your future objectives with well-planned investments. Contact now for a consultation.