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.
✓ Market capitalization
✓ Price earnings ratio
✓ Systematic investment plan
✓ Capital gains
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 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.
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 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.
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.
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.
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.
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