Investment Jargons to know

Posted by Mehul Kothari | Published on 04 Feb 2019
Image
Investment Jargons to know

Before you start investing, it’s crucial to understand a few basic financial terms. Every investment comes with its own set of investment jargon that could sound highly intricate and intimidating. Not knowing basic investment terms may push you off investing. In fact, understanding key terminologies helps you make an informed decision.

Knowing about some basic financial terms and definitions can be helpful before you take the plunge in stocks, bonds and mutual funds. This is why it is crucial to know how available investments can help you make smart decisions for your investment portfolio. Here we look at decoding the financial jargon that would be useful to you.

✓ Compounding
✓ Volatility
✓ Inflation
✓ Market capitalization
✓ Price earnings ratio
✓ Systematic investment plan
✓ Capital gains
✓ Liquidity



The simpler terms

✓ Asset class
Asset class refers to group of securities or financial instruments that show similar characteristics and behaviour. Asset classes are classified as equity, debt, cash equivalents, real estate and commodities.

✓ Risk profile
Risk profile indicates your risk appetite. In other words, it suggests how much risk you can take when it comes to investing.

✓ Investment portfolio
Investment portfolio refers to your collection of investments.

✓ Investment strategy
Investment strategy refers to planning an investment and taking investment decisions based on goals, risk level and future need of money.

✓ Diversification
Diversification refers to investing in wide variety of asset classes in order to management the overall risk.


The complex terms

✓ Asset allocation
Asset allocation is a process of spreading your money across different asset classes. The entire objective is to reduce the overall risk of the portfolio while maximising returns. There is no guarantee but asset allocation can help you absorb market volatility because your investments are diversified across various sectors of the economy. For instance, if your gold investment doesn’t fare particularly well, you can rely on your equity investment to protect you.

✓ Cash flow analysis
Once the cash flow is determined, it becomes easier for you to plan your investments accordingly.

✓ NAV
Net Asset Value (NAV) is the market value of each mutual fund unit. The NAV also determines the total fund value.
NAV = (Sum of Market Value of all shares (Including Cash) – Outstanding Liabilities)/ Total number of units outstanding in the market.

✓ Post-tax yield
The actual return of any investment needs to be weighed on a post-tax basis and not in isolation. This is because the tax implications of any investment might show a completely different result than otherwise. Hence, the post-tax yield is what matters the most as that is what affects the customers directly.

✓ Beta
Beta is the risk associated with any investment. It is measured as the standard deviation of the return from the mean return, i.e. the volatility of the investment can be ascertained through the beta of the fund. So, while opting for investments, the beta needs to be kept in mind along with post-tax yield so that the overall risk of the portfolio doesn’t rise too much.


Conclusion

Understanding the fundamentals of basic investment terms definitions and getting it are the key to successful investing. It’s important to be well aware of products and market where your hard earned money is getting invested. Knowing the basic investment jargons can help you make prudent choices.

PREVIOUS STORY

Indicators that show you need to start investing

Posted by Mehul Kothari | Published on 04 Feb 2019

Most people don’t think about when to start investing in the initial stages of their career. In fact, investing and saving for future is hardly a priority at that point. But the reality is that in investing, there is nothing like too soon. You can begin your investment journey with a very little amount as well. In fact, starting early gives your money more time to grow.To begin with investing, there is no better time than present! Here are few simple reasons for you to start taking charge of your finances; it can help you to know why to start investing. To give you an indication to start investing we list out some factors.Make up your mind to save as soon as you start earning!The perfect time to start investing is when you are young, healthy and independent. Here is why it makes sense to start investing early; here are key reasons how and when to start investing for future that can work wonders for you.- Long-term compoundingPower of compounding can do magic if you keep you invest for the long haul. Let’s take two different scenarios to understand this.✓ Scenario 1: Suman started an investment of Rs 5,000 per month at the age of 25. By the age of 60, his investment of Rs 21 lakh would fetch around Rs 1.9 crore, assuming the rate of return as 10% per annum. ✓ Scenario 2: Rahul started an investment of Rs 10,000 per month at the age of 35. By 60, his total investment of Rs 30 lakh can only fetch around Rs. 1.3 crore, assuming the rate of return as 10% per annum. Retirement corpus is lesser in the second scenario even if the invested amount is more! That’s just because investment was started ten years later. Such is the effect of time and compounding! Tips: Start investing in systematic investment plan from your very first salaryClarity on future goals indicates there is a need to investFormulate an investment strategy once you have recognised your financial goals. For example, you may want to set aside money for your marriage, which is 12 months down the line. Now that the end target is precise, you can start to fine tune the investments to reach that goal. You can similarly create long-term goals and invest accordingly. A well-calibrated investment strategy will help you realise your goal in the long term.There are some strong indicators that tell you to start investing. They are: 1. You have your financial goals penned down. This is the first step of financial planning. This is because you know how much money you need and when. It also means that you are “investment ready”.2. You have paid off your outstanding loans and still have some cash in hand. This will help you build your investment kitty.3. When investments aren’t meant to merely save taxes. Here are a few investment strategies for beginners:✓ Start today! There is nothing called the right time. The sooner you start, the better for you. Waiting for the better job and better salary will only make you miss the opportunity.✓ Take help of advisors. You can make a better choice with their help. ✓ Know the products that you are investing in. Understanding the product helps you make an informed decision.✓ Start with simple options in the beginning. Start by investing in options like mutual funds and then proceed to other asset classes like equity.✓ Monitor and review your investments.✓ Increase investment amount with time. ✓ Create emergency fund. Try to keep at least six months’ worth salary in this fund. ConclusionStarting early is the key to success. So, take charge of your financial future and get started as soon as possible. Keep reviewing your investments regularly and track their growth. This will help you reach your goals successfully.

read more

NEXT STORY

Myth Busters about Investing

Posted by Mehul Kothari | Published on 04 Feb 2019

With virtually unlimited supply of financial information accessible today, there has never been a more profitable time to know more about investing. Regrettably, there is also a good deal of misinformation that goes together with useful data.Falling prey to market misconceptions can make you commit silly investing mistakes. Getting influenced by investing myths can majorly affect your financial journey. Common myths about investing can have a severe impact on quality of investment decisions you make. So, here is an attempt to tackle some myths about investing which is decoding investment myths is essential. Myth 1. Too young to think about retirementReality: It’s never too early. You can build significant amount of corpus when you have time on your side. Being a stereotype who believes in not starting early will lose out later. Actually, starting early can help you build an enviable retirement kitty. Myth 2. Tax-saving is the objective of financial planningReality: There are lot of people who rush to invest only for tax-saving purposes. However, meeting tax goals is not the only criteria in investment. Investments are to be planned in advance to meet your financial goals too. Myth 3. Investing requires lot of fundsReality: Times have changed. You don’t need a large sum to invest anymore. There are investment options like mutual funds which allow you to invest in smaller amounts. You can invest in them for as low as Rs 500 every month.Myth 4. Fixed deposits are the best Reality: Fixed deposits are safe and provide guaranteed returns. But fixed deposits cannot fetch you inflation-beating returns. Myth 5. Bonds are very safeReality: This is a common misconception. There are various types of bonds. The degree of risk depends on its credit rating, maturity and interest-rate volatility. Understanding the relationship of price and yield is crucial in this case. Myth 6. Quick money can be earned from stock marketReality: Stock market is a great place to make money only if you have time, hard work, patience, discipline and rational approach. There’s no other substitute. Myth 7. There’s no harm over-diversifyingReality: It’s true that diversification is the key to investment success. But, over-diversifying your portfolio can dilute the return potential. Myth 8. All advisors are the sameReality: There are many advisors like fund managers, investment advisors, financial planners, brokers and insurance advisors; the scope of these advisors differ. The key is to choose the right advisor depending on what you are looking for. To sum upRational thinking and trusting the right information are two key truisms that should stick with you. This can be more than enough to debunk the general myths about investing. Nothing else should matter. People may offer to give advice but it is important for you to sift the truth from the faff.A number of factors can eat into your pension or retirement pot. These are, typically, medical costs, lifestyle upgrades, assisting children with their education, caring for older people, and most importantly, inflation that can be a huge drain on one's finances. This means it is even more essential to ensure your invested money is working hard to help you take care of yourself and the ones closest to you. At the end of the day, investment myths are more than disheartening; believing them could prevent you from building the kind of financial plan you require to address lifetime purposes. Let the myths stay with the storytellers and speak to a professional finance expert to know more about savings and investment plans.

read more

Are you Investment ready?

*All fields are mandatory

related stories view all

  • Cost Inflation Index - Meaning, Calculation & Benefits
    Posted by Rushabh H. Mehta | Published on 06 Mar 2020

    Inflation is an economic term and referred to the continuous rise in the price of goods and services, thereby reducing the purchasing power of the money. The pinch of inflation is felt by all sections of the economy, be it, the consumers, investors, and the government.  And, even though it increases the cost of living, inflation is a necessary evil and desirable for the growth and development of the economy. For the reason of inflation, it is only fair to pay more for your goods like comb and brush over the years due to an increase in the price. For the same reason, it is unfair to pay capital gains tax on your assets without taking into account the impact of inflation on the value of the asset. Cost Inflation Index(CII) is the index to calculate the increase in the price of assets year-on-year due to the impact of inflation. What is the Cost Inflation Index? Cost Inflation Index or CII is an essential tool for determining the increase in the price of an asset on account of inflation and is useful at the time of calculating the long-term capital gains on the sale of capital assets. It is fixed by the central government and released in its gazetted offices by the Ministry of Finance every year. Capital gains are the profits arising from the sale of assets like real estate, financial investment, jewellery, etc. The cost price of the asset is adjusted taking into account the Cost Inflation Index of the year of purchase and the year in which the asset is sold, and the entire process is known as Indexation. Cost Inflation Index Calculation The cost inflation index calculation is done by the government to match the inflation rate for the year and calculated using the Consumer Price Index (CPI). Cost Inflation Index India for the financial year 2019-20 has been set at 289. Change of the base year for the Cost Inflation Index The cost inflation index base year was changed in the Union Budget 2017 from 1881 to 2001. The base year was changed by the government to enable accurate and faster calculations of the properties purchased before April 1, 1981, as taxpayers started to face problems with valuations of older properties. The base year has an index value of 100, and the index of the following years is compared to the index value in the base year to determine the increase in inflation. With the change in the base year, the capital gains and tax burden has reduced significantly for the taxpayers as it now reflects the inflated price of the asset realistically. The current Cost Inflation Index Chart for each year is as under- How is the Cost Inflation Index (CII) used in calculating capital gains To calculate the capital gains on your assets the purchase price of the asset is indexed by the cost Inflation Index using the formula below- Indexed cost of the asset at the time of acquisition = (CII for the year of sale/ CII for the year of purchase or base year (whichever is later))*actual cost of acquisition If suppose you purchased a flat in December 2010 for Rs 42 lacs and sold in Jan 2019 for Rs 85 lacs. Your capital gain from the sale of the flat is Rs 43 lacs. The CII in the year in which the flat was purchased is 148, and the CII in the year the flat was sold in is 280. The purchase price of the flat after taking into account the Cost Inflation Index is = (280/148)*Rs42 lacs= Rs 79. 46 lacs  This is the indexed cost of acquisition. Your long-term capital gain after taking indexation into account is Rs 85,00,000- Rs 79,45,946 = Rs.5,54,054. Long-term capital gains on the sale of property are taxed at 20% with indexation benefit. So, your tax liability, in this case, would be- 20% of Rs 5, 54, 054= Rs 1,10,810 Without indexation benefit, the capital gains are taxed at 10%. In this case, the capital gains would be- Sale price of the flat - purchase price of the flat = Rs 85,00,000 – Rs42,00,000 = Rs.43,00,000.  The capital gains tax without indexation benefit will be 10% X Rs 43,00,000 = Rs.4,30,000. Thus, indexation helps reduce the long-term capital gains and reduce the overall tax burden for the taxpayer considerably. Indexation benefit can be used for investments in mutual funds, real estate, gold, FMPs, etc. but is not applied for fixed income instruments like FDs, recurring deposits, NSC, etc. Few important tips to remember about the Cost Inflation Index- If you receive an asset as a part of the will, then in such the CCI for the year in which it was transferred will be considered and not the CCI of the purchase of the asset Indexation benefit for the cost of improvement of the asset is the same as the cost of improvement of the asset. Cost of improvement incurred before 1981 to be ignored. CONCLUSION Cost Inflation Index is an important parameter to be considered at the time of selling long-term assets as it is beneficial for the investors. Reach out to our experts at IndiaNivesh for any queries about capital gains arising from the sale of assets for correct guidance.   Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing. 

    read more
  • Dematerialisation of Shares – Meaning, Process & Benefits
    Posted by Rushabh H. Mehta | Published on 06 Mar 2020

    The online platform has revolutionised the way we live. Whether it is transacting, connecting with a loved one, getting updated about the happenings in the world, everything can be done online. When it comes to investments, the online platform provides ease and convenience. Investment in shares and share trading is a prevalent activity undertaken by many investors. They invest their money in the stock of a company with a view to earn profits when the stock value rises. When shares are purchased, share certificates are issued in physical form containing the details of the investor and the investor. However, these physical share certificates are inconvenient, and so the concept of dematerialisation has been introduced. Do you know what it is? What is dematerialisation? Dematerialisation of shares means converting physical shares and securities into an electronic format. The dematerialised shares and securities are, then, held in a demat account which acts as a storage for such shares. Dematerialised securities can then be freely traded on the stock exchange from the demat account. How does dematerialisation work? For the dematerialisation of securities, you need to open a demat account with a depository participant. A depository is tasked with holding shares and securities in a dematerialised format. As such, the depository appoints agents, called, Depository Participants, who act on behalf of the depository and provide services to investors. There are two licensed depositories in India which are NSDL (National Securities Depository Limited) and CDSL (Central Depository Services (India) Limited). Need for dematerialisation of shares Dematerialisation of securities was needed because it became difficult for depository participants to manage the increasing volume of paperwork in the form of share certificates. Not only were there chances of errors and mishaps on the part of the depository participant, but physical certificates were also becoming difficult to be updated. Converting such certificates into electronic format frees up space and makes it easy for depository participants to track and update their investor's stockholding. Benefits of dematerialisation for investors As an investor, you can get the following benefits from dematerialisation – You don’t have to handle the physical safekeeping of share certificates. Since your investments are converted in electronic format, you can easily store them without the risk of theft, loss or damage You can access your online demat account and manage your investments from anywhere and at anytime The charges associated with the demat account are low. Depository participants change holding charges which are minimal and you don't have to pay any stamp duty on dematerialised securities Since no paperwork is required to be done, the transaction time is considerably reduced Given these benefits, dematerialisation proves advantageous. Nowadays, the practice of holding physical securities has become almost obsolete and buying through a demat account has become the prevailing norm for investors. How to convert physical shares to demat? To convert physical shares to demat, the following steps should be followed – You should open a demat account with a depository participant. A depository participant can be a bank, financial institution or a stockbroker who is registered as a depository participant with the two licensed depositories of India You would then have to avail a Dematerialisation Request Form (DRF) from the depository participant and fill the form Submit the form along with your share certificates. The share certificates should be defaced by writing ‘Surrendered for Dematerialisation’ written across them. The depository participant would, then, forward the dematerialisation request to the company whose share certificates have been surrendered for dematerialisation. The request should also be sent to Registrar and Transfer (R & T) agents along with the company The company and the R & T agents would approve the request for dematerialisation if everything is found in order. The share certificates would also be destroyed. This approval would then be forwarded to the depository participant The depository would confirm the dematerialisation of shares and inform the depository participant of the same Once the approval and confirmation is complete, the shares would be electronically listed in the demat account of the investor Buying securities in a dematerialised form If you are looking to buy stock in a dematerialized form, here the simple steps that you can take for the same – Choose your broker for buying the securities and pay the broker the Fair Market Value of the securities that you want to buy The payment would be forwarded by the broker to the clearing corporation. This would be done on the pay-in day The clearing corporation would, then, credit the securities to the broker’s clearing account on the pay-out day The broker would then inform the depository participant to debit its clearing account and transfer the shares to the credit of your demat account The depository would also send a confirmation to your depository participant for the dematerialisation of shares in your account. The dematerialised shares would then be reflected in your demat account You would have to give ‘Receipt Instructions’ to your depository participant for availing the credit of shares in your demat account. This is needed if you hadn’t already placed a Standing Instruction for your depository participant when you opened your demat account. Similarly, for sale of dematerialised shares, the process is opposite. Trading in stocks in a dematerialised format is simple, quick and convenient. It has also become the practice of the current market. So, if you want to buy or sell securities, open a demat account and start trading in dematerialised securities. Should you have any doubts, get in touch with the team at IndiaNivesh who will look into your requirement and lead you towards a quick resolution.    Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing. 

    read more
  • High Dividend Mutual Funds
    Posted by Rushabh H. Mehta | Published on 02 Mar 2020

    Dividend mutual funds are a type of mutual fund that pays a regular dividend to the unitholders of the mutual fund scheme, thereby creating a regular source of income for them. The investment strategy of the fund manager is to invest in a basket of companies that have a steady flow of income and promise to pay periodic payment to the investors. Some investors prefer a regular source of passive income from their investments. Mutual fund schemes that offer a high dividend are a popular choice for such investors. The frequency of payment of dividends is decided by the fund manager and is usually fixed. Dividends can be paid daily, monthly, quarterly, six-monthly, or yearly, and the frequency of payment is mentioned beforehand. However, there is no guarantee on the rate and amount of the dividend to the investors and the payment of dividend is subject to the performance of the fund. There are 2 types of dividend mutual funds based upon the asset class that they invest in. 1. Dividend Yielding Mutual Fund (Equity) • Mutual fund schemes which invest more than 65% of their corpus in equity shares of companies • Like any other equity scheme, they have the potential for higher returns, but also carry a higher risk • Investors should invest in these schemes with an investment horizon of medium to long term 2. Dividend Yielding Mutual Fund (Debt) • Mutual fund schemes which invest more than 65% of their corpus in debt instruments of government and corporations like treasury bonds, commercial papers, etc. • These funds carry low risk and provide average returns to investors • Interest received from the various instruments is paid as a dividend to the investors• Investors should invest in these schemes with an investment horizon of short to medium term Tax treatment for dividend mutual funds Till now, dividend income received by the investor used to be recorded under the income head of “Income from other sources” and such income was tax-free in the hands of the investor. However, as per the Union Budget 2020, the DDT is now abolished for companies and mutual funds. From April’20 onwards, any dividend received above Rs 5000 will be taxed in the hands of the investor. It will be taxed as per the individual tax slabs for both equity and debt schemes. Only debt investors who fall in the lower slabs of 10% and 20% will pay lesser taxes on dividends. For all the others, the taxation would be higher going forward. Why should investors invest in high dividend mutual funds? Dividend mutual funds offer unique advantages to the investors, especially when the macroeconomic condition of the country is weak; these investments provide the reliability of income to investors. The benefits of dividend mutual funds which should be kept in mind while investing in such funds• Fund managers of dividend mutual funds invest in companies which can pay steady dividends and even if there is a slowdown in the economy, as companies do not want to send any negative signals, they avoid curtailing payment of dividends, thus making them less volatile than other funds.• Overall returns from these funds are less affected as compared to other funds as the dividends provide a hedge against market volatility.• In a low-interest rate regime, investors looking for a higher consistent income can opt for dividend mutual funds. Disadvantages of a dividend mutual fund scheme • Returns generated by dividend mutual fund schemes are lower as compared to growth schemes in case of rising markets• These funds are not suited for aggressive investors looking for higher returns from their investment• Moreover, with the abolition of Dividend Distribution Tax (DDT), investors in the higher tax-bracket will have to pay higher taxes on the dividend income. Role of dividend mutual funds in a portfolio Invest in dividend mutual funds with an investment horizon of 7 to 10 years for optimal returns. Investment in such funds should be a part of your strategic asset allocation and to lower the volatility of the overall portfolio. Aggressive investors can allocate less than 10% of their portfolio in such funds. Conservative investors, on the other hand, can allocate a higher percentage to these funds. Essential things to keep in mind while investing in dividend mutual funds • Conservative investors looking to invest in dividend funds should invest in large-cap funds, preferably of blue-chip companies that pay a higher dividend. Investing in companies with a higher proportion in mid & small-cap companies will increase the risk of the investment, thereby defeating the purpose of investment• Invest in a fund which has been in existence for some time and witnessed a few market cycles• Avoid investing in a fund with a small corpus to minimize risk as few wrong investment calls can significantly hamper returns• The expense ratio plays a vital role in determining the overall returns from a scheme. Choose funds with a lower expense ratio   CONCLUSION Investing in high dividend mutual funds is a good option if you are looking for a regular income through dividends. Consult our experts at IndiaNivesh to help you guide through the allocation of funds in these schemes as per your investment horizon and risk profile.   Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing. 

    read more