Build Your Finance Vocabulary: Learn 30 Terms in 30 Days (Part 1)

Like all good things in life, learning about finance takes time – you start small and then build upon your knowledge. Here are some terms that will help you grow your understanding of the financial world

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Starting on your investment journey, the chances are that you may have to come across terminologies that you are not familiar with. While it might seem overwhelming at the beginning, you need to understand that you do not have to be a financial pundit to be able to invest your money where you want.

If you choose to wait until you know everything there is about finance, you would probably never start investing! When it comes to financial and management and investments; therefore, you only need to know about the standard terms that would help you create a robust investment profile from scratch. To help you start, here is a 30-day itinerary to learn about 30 common investing terms – one for each day. Here we go!

Day 1 – What is Financial Planning?

Financial planning is a step-by-step process, which is curated by experts and helps you maximize your savings and plan your finances so that you can meet all your life goals. The financial planning process involves different processes, including goal analysis and monitoring, risk profiling, asset allocation, and product selection.

Day 2 – What are Assets?

As an investor, everything that you own – whether it is money, real estate, or securities; it is called an asset. At the time of determining your tax liability or risk tolerance, your assets are listed on your net worth statement and used to make sure that you have the right financial foundation to reach your goals.

Day 3 – What Is Asset Allocation?

In an efficient investment strategy, asset allocation is substantially diversifying your savings and other assets into a variety of instruments such as stocks, gold, bonds, and money market instruments. In other words, asset allocation is a composition of any fund or your portfolio, which helps reduce your investment risk and maximize your returns.

For example, if you choose to invest in bonds, your asset allocation would comprise a split between corporate, government, and other fixed-income securities.

Asset Allocation - Max Life

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Day 4 – What is Meant by Diversification?

Diversification is a proven strategy, wherein you make investments across different asset classes such as equity, debt, real estate, and gold – minimizing your portfolio risk in the process. Diversification also acts as a cushion against the possibility of earning negative returns from a single asset class. Optimal returns are assured with diversification as different asset classes typically do not provide returns from a single source.

Day 5 – What do you mean by Portfolio?

In simple words, a portfolio is a pool of investments that you own as an investor. A typical collection may include a combination of money market instruments, insurance, mutual funds, and other options that help you earn short-term and long-term returns.

Day 6 – What is Portfolio Rebalancing?

Building upon portfolio creation, rebalancing it is all about reallocating gains from an over invested weight asset class into an under invested one. In other words, you avail profits from a well-performing asset class while purchasing more of an asset class that is under performing.

Day 7 – What is Risk?

In financial terms, the risk is the possibility of incurring a loss of value of your investments. There are various forms of risks, such as principal risk, credit risk, interest rate risk, inflation risk, and investment risk. Thus, if you are willing to take up a higher risk, you may give yourself a chance to earn maximal returns or profits on your investments.

On the other hand, investments that have a lower-risk profile may provide you a safer avenue for investment. However, the returns from such investments might not be enough to ward off devaluation due to inflation.

Day 8 – What is an Offer Document (or Prospectus)?

The offer document or prospectus is a legally-binding document that incorporates essential information about the investment goals, expenses, sales charges, and risks of a fund option. The purpose of the offer document or the prospectus is to provide you the information that you require to make a knowledgeable decision about whether you wish to invest in the fund or not. Typically, an abridged offer document accompanies your application.

Day 9 - What is Rupee Cost Averaging?

Typically, an investment strategy comprises regular investments of equal amounts in a fund. Given the fact that investors tend to purchase more units when the prices are low and fewer units when prices skyrocket, the average cost of the units you have purchased might be lower than the average price over the period that you have bought them.

This corollary is known as rupee- cost averaging. Overall, rupee-cost averaging cannot guarantee whether you will earn a profit, or your investments will be protected against possible loss in a declining market.

Day 10 – What is Value Investing?

In terms of investments, value investing is an approach wherein you favor buying stocks that are under-priced and inexpensive, relative to their intrinsic value. However, these stock options may have the potential to improve their performance and increase in terms of value in the future.

Thus, you first seek individual companies with attractive investment potential. Subsequently, you consider the industry and economic trends that affect those companies. You can begin with your search with fundamental analysis, to identify opportunities, whose current valuation may fail to depict their potential value in the long term.

Day 11 – What does Face Value Signify?

Referred to as the par value or principal, face value is the value that is printed on the face of a bond, stock, or any other financial document or instrument. Alternatively, face value is also the unit issue price of a mutual fund. It is on the face value of a fund that the percentage dividends are calculated, along with the cash denomination of the respective debt instrument.

Day 12 – What is a Unit?

A unit is a portion of ownership in an investment instrument such as ULIPs or mutual funds. The value of each unit is depicted by Net Asset Value (also known as NAV). Moreover, the NAV calculation of each unit is done by dividing the net assets of the respective money-market instrument by the total number of units.

Day 13 – What is a ULIP?

ULIPs or Unit Linked Insurance Plans are an investment option that provides the dual benefits of investment and insurance under one policy draft. The amount of money (or Premium) that you invest each month or year in a ULIP is partially allocated in different equity and debt instruments, so that you may earn market-linked returns, while the remainder goes towards providing the intended life insurance cover.

Day 14 – What is a Mutual Fund?

In simple words, a mutual fund is an investment opportunity that pools money from different unit holders and invests it towards a specific goal. The investments for each fund are chosen and monitored regularly by experts, who utilize this money to create a portfolio. That fund portfolio may consist of money market instruments, stocks, bonds, or a combination of these instruments. Overall, mutual funds allow you to leverage the advantages of diversification, affordability, liquidity, professional management, and convenience to gain substantial returns.

Day 15 – What is ELSS?

ELSS, also known as Equity Linked Savings Scheme, is a form of mutual funds that allows you to avail comprehensive tax benefits up to Rs. 1.5 lakh per year, under Section 80C of the Income Tax Act. Unlike other mutual fund options, ELSS has a lock-in period of 3 years, where after you can withdraw from the fund.

Build Your Knowledge of the Finance World

The world of investments is similar to a river – before jumping into it, you need to estimate the depth of the river. If you dive unprepared, there is a risk you might drown or get swept away by the current. Alternatively, if you invest your hard-earned money into any instrument before familiarizing yourself with the nooks and crannies of the investment world, you may risk losing the valuation of your returns or earn sub-par returns. Therefore, you need to assess your investment needs and life goals and then select the instrument that aligns with your needs and requirements.

ARN:- 20122019/KC5

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