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

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.