Essential Investment Terms for New Investors - Edelweiss Life

Have you just started investing your money? New to the whole investment, market, and finance game? Great! Investments are crucial for wealth growth. It gives a sense of empowerment knowing how to take care of your money. However, most new investors might not be aware of some of the common terms that are associated with investing.

Certain aspects related to investment seem daunting at first but are quite simple to comprehend once you learn the basics. Knowing some simple terms related to investments can help you better understand financial discourse. Moreover, learning the basics will certainly assist you in making wiser investments that facilitate your wealth growth.

Let’s look at some simple must-know terms when it comes to investing- …

Assets

An asset is anything that has some economic value. An appreciating asset will grow in value over time, generating financial profits for the asset’s owner. Most popular investment options fall under the asset category. Real estate, gold, stocks etc. are all considered assets.

Asset Allocation

Dividing your investments into various assets is known as asset allocation. This is done to mitigate risks and maximise your returns based on your individual financial goals. For example, you can buy stocks for high returns while also purchasing government bonds to counteract the risk involved in stock market investing. Asset allocation completely depends on your personal preferences and risk tolerance.

Annuity

Annuity is a financial contract where you get steady income after paying premiums to an insurance company. Annuity can be deferred or immediate. In deferred annuity, you get income after premium payments are done. On the other hand, in immediate annuity you generally start getting income after the first premium payment itself. Annuity is usually a safe investment choice for those who are looking for steady post-retirement income.

Beneficiary

In finance, beneficiaries are those who can legally claim your wealth in case of your death. Generally, beneficiaries are your financial dependants (spouse, children, parents etc). Beneficiaries have the right to sell or preserve your assets as they wish. To put it simply, they will be the legal heirs to your assets after your passing.

Bull/Bear Market

The share market tends to rise and fall dramatically, and investors refer to these extremes as the bull and bear market respectively. These terms are pretty simple to understand. A bull market is a market that is rising, meaning that those who are already invested are making profits. A bear market is a market that is falling, meaning that investors are losing money as share prices drop below their

original value. While the terms themselves are easy to understand, the causes behind a bull or bear market are highly complex and depend on the overall health of the economy.

Capital Gain

The profits that you earn upon selling an appreciating asset is known as capital gains. Essentially, your returns on investment can be called as your capital gains. It is important to calculate your capital gains, as this type of income is taxed differently from the regular income that you get from work.

Compounding

Compounding refers to the interest that you get on the interest that has already been paid out. In compound interest, your future interest payments are not only calculated based on your principal amount but also on the interest that has already been accrued in the previous cycle. So, with the power of compounding, your interest payouts are magnified over time, leading to greater wealth growth.

Creditor

A creditor or lender is a person or financial institute that has loaned money, asset, or a service to another person or financial institute. The receiver of this loan is expected to eventually pay back the creditor with an equivalent exchange of money, goods, or services.

Debt

Debt is the money you need to pay back to your creditor. Generally, the debt needs to be paid back within a specific period of time. If you fail to pay back the debt during the stipulated period, then your debt will default, leading to significant financial consequences.

Diversification

“Diversify your portfolio!” Is a common advice every new investor gets from their friends and family. But what does diversification mean? To diversify your portfolio is to invest in various assets in such a way that it reduces your overall risk. You should never invest all your money in one place, as the failure of that one investment can eradicate your savings. Instead, you should invest bits and pieces of your savings into various assets that complement each other.

For example, you can invest half of your money in a market fund and dedicate the other half to a guaranteed income plan. Your market funds will be risky but will provide better returns if they perform well. On the other hand, your guaranteed income plan will provide modest returns, but at least the returns will be assured with little to no chance of incurring losses.

Inflation

Inflation is the rate at which the cost for goods and services increases over time. All investments are affected by inflation. Inflation causes the cost of living to gradually increase, and this means that the value of your money gradually decreases. Ask your parents what they could buy with ₹500 when they were young and compare that to the value of ₹500 today. This is why you shouldn’t just save all your money in a back account. It is better to invest ₹500 than to just keep it saved in your wallet, as your invested money has the potential to grow over time and surpass the current inflation rate.

Moreover, you need to avoid investments that grow at a rate lower than the inflation rate. Any investment that is incapable of beating the current inflation rate is a net loss. Say for example the rate of returns for an investment is 4%, but the current inflation rate is 6%.

So, your nominal interest rate = 4%

But your real interest rate = nominal interest rate – inflation rate = 4 – 6 = -2

This means that in the above example, your actual growth rate (adjusted for inflation) is -2%! This means that you are losing purchasing power over time, instead of growing your wealth.

Nominee

Nominees and beneficiaries are terms that are sometimes used interchangeably, but they are technically not the same thing. According to Indian law, a nominee is someone who will take control of your assets post your death. Note that the nominee can only manage assets that they have been nominated for. For example, if you name your sibling as a nominee for a bank account, they will only have nomination rights to that specific bank account. However, in India, the rights of a beneficiary supersede those of a nominee. So, your legal heirs or beneficiaries will always have final control over all your assets post your death. Note that a person can be a nominee as well as the beneficiary. In fact, most people tend to appoint their beneficiaries as nominees of their financial assets. This prevents any legal disputes from arising in the future.

Risk Assessment

The word ‘risk’ is quite commonly used when discussing investments. To put it simply, an investment is risky if there is a chance of losing your money instead of making a profit. The higher the chance for a loss the greater the risk. In reality, all investments are risky to some extent. However, the extent of risk varies drastically based on the type of investment.

For example, investing in the stock market is generally considered to be risky, as stocks are volatile and tend to rise and fall in value erratically. Of course, while stocks are risky, they also offer the chance of higher returns. On the other hand, guaranteed income plans can be considered low risk investments, as the money you get back is completely assured no matter what.

Liability

Anything that loses value over time is a liability. Cars, appliances, gadgets etc. are expensive products that eventually lose their value, especially if they have been previously used by someone else.

Conclusion

Learning more about the terms shared above will help you better comprehend the investment market. You can also choose safer/risk-averse investment instruments as you start off, such as guaranteed income plans or mutual funds. If you want to investment in market funds while also securing your family’s future, then consider buying a Unit Linked Insurance Plan (ULIP), which offers both investments and life insurance.

 

Aastha Mestry - Portfolio Manager 
An Author and a Full-Time Portfolio Manager, Aastha has 6 years of experience working in the Insurance Industry with businesses globally. With a profound interest in traveling, Aastha also loves to blog in her free time.