But these 30 things about money will make wiser.
Score yourself on how many things you know from these 30 things.
Well, this is very basic and I am sure you already know this.
There are three ways you make money
1.By earning more
2.By saving more
3.By getting more returns on savings
Earning more requires you to develop skill sets that are valued by companies.
The more irreplaceable you are, the bigger paycheck you can demand. Saving is important because you do not want to be working for rest of your life.
Also, what if some emergency strikes you?
What if you have a big ticket expense like marriage, buying a house etc.
But what gives your money a big boost? It is when your savings start making huge returns.
“Compound interest occurs when the interest that accrues to an amount of m
“Compound interest occurs when the interest that accrues to an amount of money in turn accrues interest itself. It’s the deceivingly simple force that causes wealth to rapidly snowball.”
Starting compounding your money as early as possible is one of the wisest decisions you can take in your life. In simple words, you start earning interest on the interest you have earned so far – so it creates a positive feedback loop.
So you might have saved a lakh in your savings bank account and are happy with yourself for having saved that much, aren’t you?
Sorry to disappoint you but you are actually losing money by putting it in a savings account.
Typically, a savings account offers interest of around 4% while inflation is much higher than that.
In essence, you are losing money. Besides, there is always the temptation to spend money for something that is not really needed.
You actually end up losing your money, because the real purpose of money is to buy something. And because of inflation you will be able to buy lesser.
Investing helps in making your money to work, so that you can generate more money.
There are many options to invest your money.
However all of them are fundamentally one of these three – equity, debt and asset.
Equity means that you are owning part of a business in some way and that business will share profits with you.
There are multiple ways you can invest in equities – buying stocks of publicly listed companies, buying equity mutual funds that buy stocks of these companies, or investing in privately held companies.
Debt is when you lend your money to someone with an agreement of interest.
Fixed deposit (FD) is an example of debt. Government organizations raise a lot of money through debt.
Two important things to take care of while investing in debt are
1 What is the duration of lending?
2. What is the interest rate?
Apart from this, you need to make sure that you will get your money back, so you also need to check for the probability of default.
The other option is buying hard assets like real estate or gold.
Short term saving is done typically if you need money in the near future.
For example, let us say you decide to have 6 months of emergency funds. Or you decide to buy an apartment in 2 years.
Long term is done for long term goals like retirement (who does not want to retire early?)
When you invest for short term, you cannot invest in products that have high volatility (fluctuation in value of the investment).
There is possibility of incurring a loss.
While for long term, temporary ups and downs will not impact your return.
Knowing whether your goals are short term or long term and aligning your investments with the nature of your goal is very important.
This is best explained through an example.
Let us say Amit starts a business of manufacturing lamps and selling them.
He needs an investment of Rs 2 lakh to start this business. However he does not have enough money.
He goes to Sumit and asks for Rs 1 lakh and gives him 25% ownership of his new business. That means Amit’s lamp business is valued at Rs 4 lakh and Sumit has shares worth 25% in it.
Now, extend this idea to a company worth crores of rupees and instead of one shareholder Sumit, there are thousands of investors.
Further, there are thousands of such companies and shareholders of these companies can buy or sell shares in a marketplace.
Earlier, we learnt about stock markets and how shares of companies are traded at stock markets.
For most investors it is very difficult to figure out which stocks to buy or sell and when to buy or sell them.
For them, there are mutual funds (MF).
Mutual funds are funds run by professional money managers who invest in stock markets.
Further more, they break the fund into very small chunks called units and offer them to investors.
In return, they charge their fees for managing these funds. As the fund invests in stocks, they are called equity mutual funds.
Similarly, there are mutual funds that invest in debt – either debt raised by government or companies. These are called debt mutual funds.
To start with, are you looking for Debt or Equity funds?
What is the track record of Fund Managers? What is the expense ratio? What is portfolio concentration?
Does the fund invest in small cap, mid cap or large cap?
How is the fund rated? What is size of the Fund? How is the past performance? What is the exit load?
It is better to understand what this means before investing in mutual fund.
Usually expressed as a percentage of assets, this is the money you pay each year to the fund house for managing your money.
You do not pay this fees directly.
The fund house will deduct this amount from your investment.
For actively managed funds, the expense ratio is around 2%.
This means that you, as an investor, pay around Rs.2000 for every lakh invested in a fund.
Expense ratio can make a huge difference on the return you get.
When you look for mutual funds, you should consider an expense ratio.
Liquidity, in simple terms, describes how easily and quickly you can convert your investment into cash or its equivalent.
Cash is considered most liquid as it can be quickly and easily converted to other assets.
Let us say you want to buy a phone for Rs 10,000.
Using cash to buy it is the easiest way.
If you have no cash but a rare painting that is worth Rs 10,000, you are unlikely to find someone who is willing to trade the painting for the phone.
Instead, you will have to sell the painting and use the cash to purchase the phone. Selling a rare painting will take time – may be a few months.
But, what if you only have a few days left to buy that phone? You then have to sell the painting for a discount, instead of waiting for a buyer who was willing to pay the full price.
Rare painting is therefore considered an illiquid asset.
As the name suggests, fixed deposits or more popularly known as FDs are deposits for a fixed duration and a fixed rate of interest.
Fixed deposits are offered by banks and companies.
Most of the times, you can create an FD with the same bank in which you have a savings account.
Debt is another way for companies to get money apart from the equity.
Debt raised by companies, also referred to as bonds, are rated by credit rating agencies.
Typically, high rated debts give a lower interest.
On the other hand, very low rated corporate bonds (sometimes called junk bonds) provide very high interest rates, but there is high risk of company not giving your money back.
ETFs (exchange-traded funds) are closed mutual funds that generally invest in the same proportion as the index they track.
Each ETF tracks a particular index – equity, debt or gold indices.
They are popular among passive investors who do not have time or interest to invest in stocks directly but want to participate in the markets.
ETFs closely match the returns of the indices they track.
Tracking index individually will cost more in terms of time, brokerage and needs a large investment.
Another important point is that ETFs trade on exchanges so you can buy or sell them like any other stock.
An index consists of a set of companies carefully chosen to represent the performance of a stock-market or a sector.
In India, there are two major indices S&P BSE Sensex and Nifty 50.
Index funds are low-cost mutual funds that track an underlying index. For example, HDFC Index Fund – Nifty Plan invests in a way that its performance is almost same as Nifty 50 index.
Such funds have an advantage of a low-expense ratio (typically less than 0.5%) as compared to actively managed funds (typically 2-3%).
Click here if you want to know more about Index.
Portfolio is a basket of financial investments like stocks, mutual funds etc. Investors measure the aggregate performance of their portfolio.
A portfolio can have just one mutual fund or it can have hundreds of different financial products.
Some people also classify portfolios into conservative or aggressive or many different levels between the two degrees.
There are multiple ways you can save tax and section 80C is one of them.
Under section 80C, a deduction of Rs 1,50,000 can be claimed from your total income.
In simple terms, you can reduce up to Rs 1,50,000 from your total taxable income through section 80C before paying income tax.
There are multiple investments that you can claim under 80C. Some of the popular ones are as follows:
More on Section 80C
Public Provident Fund (PPF) scheme is a popular long term investment option, backed by Government of India which offers safety with an attractive interest rate and return that are fully exempted from tax .
Investors can invest a minimum of Rs.500 to a maximum of Rs. 1,50,000 in a financial year.
You can get the facilities such as loan, premature withdrawal and account extension.
Here are more details on PPF.
Tax free bonds are the bonds issued by government backed entities and do not carry tax on the interest earned on these bonds.
They are very popular among high tax bracket individuals, as net return rate turns out to be very good.
Sometimes, bonds also trade in secondary markets (stock markets).
Their typical tenure is 10/15 years but they are traded on stock exchange.
Equity Linked Savings Scheme (ELSS) is special type of a mutual fund that qualifies for tax benefit under section 80C of IT Act.
There is locking of three years for this type of investment – that means you cannot withdraw money before 3 years.
Check here to learn more about ELSS.
National Pension System (NPS) is a retirement savings scheme.
It has been designed to enable systematic savings during the investor’s working life.
Under the NPS, an individual’s savings are pooled in a pen a pension fund.
These funds are invested by PFRDA regulated professional fund managers in the diversified portfolio comprising of government bonds, bills, corporate debentures and shares.
PFRDA stands for Pension Fund Regulatory and Development Authority.
When you exit from NPS, you can use your investment either to purchase a life annuity from a life insurance company or withdraw a part of the accumulated investment as lump-sum.
First Rs.50,000 invested in NPS will be tax free for a new investor in stock exchange.
Insurance and Investments are two different things and lot of people confuse between the two.
When you buy insurance you are hedging against any unpleasant surprise in your life.
When you do investment, you expect to make more money on your investment and enjoy it.
There are lot of products in the market that combine insurance and investments – and these further confuse investors.
In addition, there are so many agents who mis-sell these complicated products.
(because they get lot of commission – you should read about Agency Problem).
Sometimes I wonder who coined these complicated terms for such simple things.
But then, I could not come with a simpler term either.
An annuity is an insurance product that pays out regular income, often used as part of a retirement portfolio.
On the other hand term plan is an insurance product that pays you (actually someone you nominate) when you are dead!
For the products you pay a premium – either one time or at regular intervals, typically annually.
If simplicity was not enough, people introduced ULIPs.
ULIP stands for Unit Linked Insurance Plan.
It is mixture of investment and iinsurance.
Some part of the premium is used to provide insurance coverage while the remaining is invested in various equity and debt schemes.
Policy holders have the choice of selecting the type of funds (debt or equity) or a mix of both based on their investment need.
Like mutual funds, ULIP policy holders are also allotted units and each unit has a net asset value (NAV) that is declared on a daily basis.
Typically ULIPs, charge lot of fees that is deducted from the premium – so your entire amount is not invested on your behalf.
Charges include policy administration charges, premium allocation charges, fund switching charges, mortality charges, and a policy surrender or withdrawal charge.
The investments made are subject to risks associated with the markets.
When companies have excess money because of profit or reserve, they share these profits with the investors in form of dividends.
It is not necessary for a company to pay dividend.
Some companies think that they can better utilize this money in growing further and giving better returns.
Some pay most of the profits as dividends.
Dividends are tax free for investors but companies need to pay dividend distribution tax. However, like any other law, this can change too.
Some of us have a fascination for gold.
And that does not include just jewelry.
People also invest in gold coins.
The problem with gold is that there is no interest or dividend (if you do not know what a dividend is, you missed one of the points above).
But gold is good to keep as an insurance – what if the world falls apart and paper money loses its significance?
Only hard assets would matter in such a case and gold will come to your rescue.
Another problem with gold is the high maintenance cost – you need to store it safe somewhere.
Enter Gold ETFs – a way to invest in gold without actually having it.
GS Gold ETF is one of the most popular ETF listed and you can buy it just like any other stock in the stock market.
Some people are big on real estate investments.
You would have heard phrases like “real estate never goes down”.
However, it is important to know some important facts about real estate.
1.Real estate is a hard asset: If something goes wrong, and if you own a house you will at least have a place to stay.
Or if you have an agricultural land, you can produce something.
2.If you have invested in a house, it will generate some rent. Similarly for agricultural land, it will product something and give you some income.
1.In current scenario, real estate needs a lot of investment at one shot. Unlike a stock that you can buy for Rs 100 or Rs 1000, real estate investments are typically in lakhs or crores.
2.Real estate investments are not very liquid – you cannot sell them easily whenever you want.
3.The yields (i.e. the income that real estate investments generates) are very low compared to the investment.
The return on most of the current investments is from the increase in price of the real estate.
Life is very unpredictable, so better be prepared for any possibility.
There are two important things about emergency fund
1.Your emergency fund should be able to sustain you and your dependents for at least 6 months
2.Your emergency fund should be liquid – that is, you should have access to it at any time
Emergency fund gives you a good breather in unforeseen circumstances of your life.
Always hope that you never have to use your emergency fund.
Loan help us in three ways:
If interest rate is lower than the inflation, then you effectively are losing money.
Better to spend that money in this case, or better take a loan!
Net Worth = Assets – Liabilities.
Now what are assets and liabilities.
Assets are anything that you own.
Your house, your gold, stocks that you own, money in your bank, or anything.
Liabilities are anything that you owe to someone.
If you have any loan, that is your liability.
Do you know your net worth? If not, better to find it out.
One day you will retire and start living off on your investments.
At a young age it is very difficult to imagine that you will retire one day.
But it is a hard fact of life. Do you know when you can completely rely on your investments?
There are calculators available that can help you figure out the savings you need to do to retire at a specific age or vice versa.
Some amount of visibility on this will help you to prepare for your retirement.
Do let us know if we missed anything that we should cover in this list!