Financial jargon can often get between you and your money. We bring you closer together with this A-to-Z guide.
A 2017 survey by global consulting leader Mercer revealed that women are less prepared for retirement than men and are average risk-investors. What’s getting in your way? Women, the survey found, have little knowledge of investments and feel further alienated by jargon.
But knowledge is power-or, in this case, knowledge is money. Though financial literacy can’t be achieved overnight, it can be helped along by a grasp of the basic terms that are commonly used by advisors, analysts, economists, and commentators.
We consulted experts to come up with a glossary to get you started.
It is a fixed sum of money that is paid each year at regular intervals, usually for the rest of the person’s life.
Assets are items of value, like your car, real estate, or cash. An asset mix is a percentage breakdown of all the assets you own. For example, your home may account for 30 percent of your asset mix while cash may account for just 5 percent.
When you buy a bond, you are lending money to the company selling it. In turn, the company pays you money determined by set conditions. It normally includes a fixed income that is dispersed at regular intervals. The money you lent is paid back at a specified date.
When you invest in it, your money gets divided between riskier assets (like the shares of the company) and less risky ones (like bonds).
A basis point is one-hundredth of a percentage point. An increase of 100 basis points would mean an increase of 1 percent.
This interest is paid on principal plus interest. Say you have INR 100 and get 10 percent interest from your bank for two years (i.e. INR 20). So after two years, you have INR 120. This is simple interest. With compound interest, you get an interest of INR 10 in year one. In year two, you get interest on the principal plus interest (on INR 110) that is INR 11. So, the total amount after two years is INR 121.
It is your history relating to timely repayments of credit card bills and loans. Typically, home loans are given based on your credit rating.
It invests in fixed-income securities like bonds and treasury bills. Generally, they have a set of maturity date and pay a fixed rate of interest.
An amount paid by a company to its shareholders from profits made.
It is an electronic account for your shares. It holds the stocks that you have purchased and/or are in your name.
Equated monthly installment refers to the amount you pay back every month towards the repayment of a loan.
Employment Provident Fund, or PF as it’s commonly referred to, is a plan in which you and your employer contribute money that can be used when you retire.
A fund that invests in different companies listed in the stock market. You make or lose money depending on how the company fares.
It keeps on fluctuating with the changes in market interest rates. Debt instruments such as loans or bonds could have floating interest rates.
Foreign exchange refers to the conversion of one currency into another. For instance, US $1 can be exchanged for about INR 64.
It is a period after due date when a payment can be made without a fine being levied. The late payment does not result in default or cancellation of the loan.
Gold Exchange Trading Fund
It is a type of fund, which in turn invests in gold. It gives higher returns than when you invest in physical gold.
Taking steps to protect against a risk is called hedging. For example, in Delhi, during the foggy winters, there is a chance of your flight getting canceled. So you book a railway ticket as a backup. This is a case of hedging against the risk of flight cancellation.
It occurs when the value of currency lowers and cost of goods rises over a period of time. When you hear your grandmom say how she used to buy candy for 10 paise as a child, and now costs INR 10, she’s talking about inflation.
A person has an insurable interest in something when damage to it would cause the person to suffer a loss. For example, items in an office can be insured against the risk of theft.
Joint and Survivor Annuity
A pension scheme that typically has two beneficiaries, usually a married couple. It guarantees payments while both beneficiaries are alive. In the event of a death, the surviving spouse receives a regular income for life.
Know Your Customer is a process introduced by financial institutions for customer identification. You have to submit your photograph, address proof, occupation, etc. for verification.
How quickly you can get cash when you need it is known as liquidity. For example, selling a TV will take a few days’ time, but selling a house will take considerably longer. So, your TV is a more liquid asset.
The minimum period for which you have to keep money mandatorily in any investment. For example, if the lock-in for a fixed deposit is five years, a fine is levied if you withdraw money before this term.
It is a loan taken to buy a property. If the loan is not paid back, the lender can take over the property.
It’s a professionally managed instrument that pools its investors’ money in such a way that their investments are diversified. Mutual funds are usually of three types: equity, debt and balanced.
Net Asset Value
It is what you own minus what you owe against that particular asset. For instance, if you own a house that is valued at INR 50 lacs today and you have taken a loan of INR 20 lacs for it, its NAV is INR 30 lacs.
Through nomination, a policyholder or a bank account-holder may appoint another person/s to receive a benefit in case of a death claim.
The price at which a company offers its share to the investors in an initial public offering, i.e. when it goes public.
An amount paid periodically to the insurer by the insured for covering their risk.
It is a grouping of financial assets such as cash, bonds, stocks, and also their fund counterparts.
Public Provident Fund is a long-term investment option. It has a fixed interest rate and returns that are exempted from tax.
It divides a list of numbers into quarters. For example, top 25 percent funds of a category will be in the first quartile.
It is the process of identifying, assessing, and reducing risks. For instance, if you have shares in a cigarette company and the government is expected to announce a tax hike, then be prepared for a fall in share price.
It is the return you get from an investment after adjusting inflation. Say, your bank offers you an interest rate of 7 percent and the inflation rate is 6 percent. Your return is 1 percent.
Abbreviation for systematic investment plan, it is a way to put small chunks of your money in a mutual fund at regular intervals.
It is one of the equal parts a company’s capital is divided into. It entitles the holder to an equal claim on the company’s profits and company’s losses.
When you appoint a person (X) to look after your wealth after you beneficiary, say (Y), you create a trust with X.
These are market-linked insurance plans that provide both benefits of both protection and investment.
It is the pace at which prices move, and how much they swing. The higher the unpredictability, the riskier the investment.
It is a legal document made by a person to plan what happens to their assets in the event of their death.
It’s the value of an asset after accounting for normal loss over time. Say you buy a mobile phone for INR 10,000. After two years when you sell it, you get INR 2,000-its written-down value.
The return or income you make on your bonds, shares, etc.
This is a kind of savings account that doesn’t require you to maintain a minimum balance throughout the year.
Related Article: Five Ways to Inculcate Good Money Habits.