Learning and understanding investing terms when you are just starting out with investing in mutual funds can definitely seem a bit confusing or daunting at first. What are mutual funds? Are they the same as stocks? We know, we know, it’s even more confusing than the Pythagoras Theorem.
There’s absolutely no need to get intimidated and feel like you need to know all of these words in one go. There’s a lot of jargon out there and you’ll understand it as your grow in your invesing journey alongside your money.
We’re breaking down a few of these complicated investing terms for you here to get you started. Soon, you’ll be speaking the investor lingo like a pro!
Before we even understand anything else, let’s talk about what investing itself means. Any investment is a financial asset bought with the idea that the asset will provide income further or can be sold later at a higher cost price for a profit. So, what is investing then? It is simply the act of purchasing these financial assets to gain a profit later. Let’s understand this with an example, suppose you buy a limited-edition Nike sneaker, knowing that you could probably resell it in a few years and make more money than you spent on it, then the amount of money you spend on the sneaker can qualify as an investment.
A folio is a unique number assigned to an investment in a mutual fund scheme. This number is issued to you – the investor, and you can then use it in the future for subsequent investments. This is similar to a bank account number as it helps an investor track his or her mutual fund investments. While an investor can hold multiple folios with a mutual fund, a consolidated mutual fund folio is advised as it makes tracking investments easier.
A mutual fund is a pooled portfolio. It is a type of financial vehicle that is made up of a pool of money collected from many investors to invest in stocks, bonds, and other assets. They are operated by professional money managers who allocate the fund’s assets and try and make a profit for the fund’s investors. So, imagine if you and your friends started a common pool to buy snacks from the canteen. If you put in 10 rupees everyday,
you get a puff, but if you put in 20 rupees you get a puff and a cold drink. Similarly, as an investor you can buy mutual fund ‘units’, which basically represent your share of holdings in a particular scheme. These units can be purchased or redeemed as needed at the fund’s current net asset value (NAV – covered in this glossary too!). The biggest advantage of investing through a mutual fund is that it gives small investors access to professionally managed, diversified portfolios of equities, bonds and other securities, which would be quite difficult to create with a small amount of capital.
Liquidity basically is the ease with which a mutual fund or any asset can be converted into ready cash without affecting its
market price. It is how quickly any asset or security can be purchased or sold without causing a drastic change in the asset’s price. Some funds may have a specified lock-in period and may not be as liquid. Cash is the most liquid of all assets. So, for example, if you wanted to purchase a fridge that cost Rs. 30,000, cash would be
the easiest way to pay for it. If you had no cash but a collection of rare books that were valued at Rs. 30,000 you would have to wait for a buyer to buy them at full value and then use the cash to pay for the fridge, which could take a long time. In this case the rare books are not as liquid an asset as cash.
Returns are a profit or loss on your investment. Suppose you invest Rs. 500 in a mutual fund and earn Rs. 550 on it, Rs. 50 would be your return on investing.
A company’s capital is divided into small equal units of a finite number. Each unit is known as a share. In simple terms, a share is a percentage of ownership in a company or a financial asset. Investors who hold shares of any company are known as shareholders. For example; if the market capitalization of a company is ₹10 lakhs, and a single share is priced at ₹10 then the number of shares to be issued will be 1 lakh.
An asset is any resource with financial or economic value that an individual, corporation or country owns with the exception that it will provide a future benefit. In other words, an asset can be thought of as something that, in the future, can generate cash flow. For example, you owned a rare coin collection, which you think can sell for a lot of money in the future, that rare coin collection can be considered an asset.
NAV or Net Asset Value is often associated with mutual funds, and helps an investor determine if the fund is overvalued or undervalued. The NAV gives the fund’s value that an investor will be entitled to at the time of withdrawal of investment.
We hope this glossary was helpful! Now go show off your new found knowledge!And if you’re ready to step into the world of goal-based investing, get started with micro-investments or investing in round-ups and download Deciml.