Month: January 2008

Terms and Terminologies used in Finance, Insurance, Tax, Stock Market investment etc.

Posted on by Jagoinvestor

A lot of people avoid investing in shares because of the lack of knowledge about stock market investments. In this article, I’m going to tell you about the important terms and terminologies related to investment, finances, insurance, and tax.

First of all let’s know the meaning of each term.

Terms and terminologies of Stock market investment

Share or Stock: A Share is a representation of the amount of a company that you own. So if you own 100 shares of a company that has 100000 shares you are an owner for 1/1000th part.

Entry Load: Commission paid while purchasing units of a mutual fund from a broker, No Entry Load to be paid if directly purchased from Mutual Fund Office or its Website online.

Exit Load: Commission paid while selling off the mutual funds before a specified time limit. generally it is. 5% or 1% if exit before 6 months or 1 year.

NAV: The current price of each Unit of Mutual Fund, it goes up or down depending on the growth or decline in value of mutual fund investment.

NFO: New Fund Offer, When a new Mutual Fund is Launched, its call NFO of that Mutual Fund.

Different types of funds

Open Ended Mutual Funds: Mutual funds without restriction on Entry or Exit, Anyone can buy or sell the units anytime.

Close Ended Mutual Funds: Mutual Funds having restriction time on entry and exit , there is some particular time duration to buy the units and then its locked for some pre-decided period. For Eg. ABC mutual fund, a 3 years Close Ended Fund.

Growth option in Mutual Funds: Upon choosing this option, a unit holder does not receives any dividend from Mutual funds but the money it is added to investments which helps in increasing the NAV of mutual fund. Its good for people who do not want to receive cash regularly as dividend.

Dividend Option in Mutual Funds: By choosing this option a investor receives the dividend from the mutual funds whenever it is declared. Its good for investors who need regular cash.

Equity Fund: These are the funds which put most of there money in Equity and less in Debt. Equity refers to instruments with high risk and high returns like Shares, and Debt refers to instruments with no risk or low risk and less returns like bonds, Fixed deposits etc. These are high risky and with high returns.

Debt Fund: The funds which put more money in Debt and less in Equity. these are Less risky and with less returns.

Balanced Fund: The Funds which have money in both the categories in a ratio such that it makes it medium risk and medium return Fund. The ratio need not be 50:50 … even a ratio of 70:30 in booming markets can be considered as balanced. and 20:80 in bad situation will be considered as balanced.

Fund House: A Fund House is a company which manages money invested in different kind of mutual funds. Like all the HDFC Mutual funds belong to

Sectoral Funds: These funds put money in a specific sector or a group of inter-related sectors. They have high risk, high return nature.

Fund Managers: These are the experts who manage he Mutual Fund, they take the decisions like, which sectors to put money in, and which company they will pick up, the strategy, the road map, etc …

Watch this video to learn about different terms of the stock market:

Mutual Fund Benchmark: Every mutual fund has a benchmark against which they measure their performance, they perform better than there benchmark it’s considered that they have done good, else bad. For Eg. A lot of mutual funds have Sensex as the benchmark, some sectoral fund investing in Pharmaceutical may have BSE Heath care as its benchmark.

SIP (Systematic Investment Plan): This an investment method through which you can invest in mutual funds every month. Instead of paying 60,000 together, one can take a SIP of 5,000 for a year.

Stock Market: It’s a market that facilitates the buying and selling the shares of companies by connecting buyers and sellers. It can be considered as a mediator between buyer and seller. So anyone who wants to buy or sell shares can do it from the stock market.

Sensex and Nifty: These are indexes of BSE (Bombay Stock Exchange) and NSE(National Stock Exchange). Sensex and Nifty, are indicators of how prices of major stocks are moving at any point in time. Sensex comprises of 30 Shares and Nifty comprises of 50 shares.

They are calculated by a method called “Free Flow Market Capitalization” . When Sensex moves up it indicates that on an average more shares have increased there value and some have declined and vice-versa. It moves up or down depending on the combined valuations of the shares they comprise of.

Market Capitalization: This means how much worth all company shares collectively are. Simply putting:

Market Capitalization = Total number of shares available X Current Price .

Its the total money required to buy all the shares of the company available to the public.

IPO (Initial Public Offer): When a company offers shares to the general public for the first time, its call IPO. The purpose of this is generally to raise funds to finance their future projects and expanding there business.

Correction: It is a sharp increase or decrease in the stock market which was overdue for long. When market goes more up or down than expected because of rumors or for some short term reason, then to average out that correction happens …

Term Insurance: In this, you are insured for a big amount for a very less annual premium, but don’t receive anything when your maturity expires. Its a very cheap form of insurance and considered the best insurance anyone can get.

Endowment and Money Back Plans: In this you get insurance and you get a big lump sum after the tenure expires along with periodic payments in between. The premium is high per Annam.

ULIP’s: These are insurance+investment product, from the premium you pay, some amount is used as your premium towards insurance and rest is invested as per your choice. this product needs a lot of questions to be answered before taking it.

Short Term and Long term Capital Gain and Loss :

In the case of Shares and Mutual Funds, Any profit or loss made within 1 year. Tax treatment will be:

– Short term profits : 15% flat. (2008-2009)
– Long term Profits : Nil

In the case of Land, House, Jewellery, Any profit or loss made within 3 years. Tax treatment will be:

– Short term profits : 20% Flat
– Long term Profits : 30% Flat

Portfolio: Total investments combined are called Portfolio. So if Person ABC has invested Rs x in shares, Rs.y in Insurance, Rs z in PPF and Rs k in Real Estate, it will be combined to his Portfolio.

Trading Account: An account through which a person deals in instruments on the stock market.

Demat Account: An account where shares are stored in electronic format. It’s just an account which stores shares.

Commodities: Commodities are things like sugar, steel, etc … A person can trade in these things also just like shares and mutual funds. Multi Commodity Exchange of India Limited (MCX) is the commodity exchange in India just like BSE and NSE for shares.

I would be happy to read your comments or disagreement on any topic. Please leave a comment.

The importance of Power of Compound interest and Early Investing

Posted on by Jagoinvestor

This post talks about the importance of Investing early in life and do not get late at all. Also it shows the power of compound interest and regular investing.

When we invest early in our lives, the amount keeps growing and when it becomes a big chunk, the growth in amount every year is a lot more, compared to initial years .

Power of compound interest

For Example:

Suppose you start in 2008 and want to save for retirement and If regularly invest 1 lacs every year at 15% return per Annam , the investment will be Rs 4.35 Crores in 2038 , but if you do late for 2 years and start in 2010 , it will be Rs 3.27 Crores only by 2038 , that will leave you with Rs 1.08 Crore less money.

Even a delay of 1 year will result in total corpus of Rs 3.77 Crores , which is short of Rs. 58 Lacs. This 58 Lacks is nothing but 15% interest on 3.77 Crores which you missed.

This happens because in later years you don’t get benefit of compounding.

Lets see two Case studies and there results of early investing:

CASE STUDY 1

Robert and Ajay start career same time at age 23

Case 1 (Ajay) :

  • Understand the importance of investing Early, enjoys some time and then …
  • Start investing early (at 25) and invests Rs 50,000 every year.
  • Assuming 10% return every year , accumulates Rs 7.97 lakh at the end of 10th year. (This is annuity , don’t confuse with Compound interest 🙂 )
  • Stops after that and doesn’t invest extra money till he is 65 , he just leaves that 7.97 lacks in investment and that keeps growing.
  • when he is 65 , he has Rs 1 Crore 40 Lacs 🙂

Case 2 (Robert):

  • Spends a lot and doesn’t believe in investing early, and when he is 35 he starts investing for next 30 years he regularly invests 50,000 till he is 65.
  • Assuming the same return of 10% per year.
  • He has only 82.2 lacs 🙁
  • Even after saving for extra 20 years Robert has 43% less than Ajay .
    Total amount after n years with A amount every year at i .

return=A *[(1+i)^n-1]/i

Ref : https://en.wikipedia.org/wiki/Annuity_(finance_theory)

Watch this video to learn the power of compounding:

CASE STUDY 2

After 100 years : Robert from Robertsganj and Ajay from Haryana (rebirth) , This time Robert is extra smart and Ajay is a Software Engineer.

Both are 25 and want to retire at 60 , both earn good money … (both can invest 1 lac per/year) … assuming return at 12% per/Annam …

Case 1 : Robert starts early , invests 1 lac each year for next 10 years, In this 10 years his money grows to good amount and he just keep that money invested till he retires …, he can invest for another 20 years also but now he spends all this 1 lac for travelling and enjoying his life every year …

Case 2 : Ajay thinks Robert is an Idiot, who is not enjoying his life, what bad will happen if he starts after 5 years , he thinks lets enjoy some years .

  • Case 2.1 : After 5 yrs he starts investing 1 lac every year for next 5 year … He sees that Robert has stopped investing now and enjoying now, so he also does same , stops investing and leaves his money invested which is growing …
  • Case 2.2 : After 5 yrs Ajay starts investing and thinks that he will now invest for next 30 years till his retirement, he wants to have more money than Robert at the end.

Results at 12% return

  • Case 2.1 : Ajay get how much ??
    – 66 lacs
  • Case 2.2 Ajay gets ??
    – 1.64 crore

And what about Robert? investing 10 yrs and stopping after that and enjoying for next 20 years

– 1.72 crores !!

I would be happy to read your comments or disagreement on any topic. Please leave a comment.

 

Types of mutual funds – Which every investor should know before investing

Posted on by Jagoinvestor

Do you know about the types of mutual funds you are going to invest in?

A lot of people are unaware of these different types of mutual funds even though they invest in it on a regular basis. Every mutual fund investor either he is beginner or regular must know about the categories in which mutual funds are classified in order to generate a good return.

In this article I will tell you 10 different categories of mutual funds which will be helpful for you to improve your investment portfolio.

types of mutual funds

Mutual Funds

You must be aware of what are mutual funds. If not the click here to read the basics of mutual funds.

A mutual fund is the advance tool of investment which has a large number of investors. These funds are classified into different categories based on the goal of investors.

Let’s see the categories of mutual funds.

Types of Mutual Funds

Mutual funds are categorized on the basis of their objectives, style, and strategy. Investing in Mutual Funds only is not enough to get good returns. You should know about the types of mutual funds and then invest in different funds by deciding your goal.

The different types of mutual funds are enlisted below:

  1. Diversified Equity Funds
  2. Tax saving Funds (ELSS)
  3. Balanced Funds
  4. Sectoral Funds
  5. Mid Cap and Small Cap Funds
  6. Index funds
  7. Exchange-Traded Funds
  8. Fund of Funds
  9. Debt Funds
  10. Liquid Funds

Watch this video to know more about the types of mutual funds:

1. Diversified Equity Funds :

These are those mutual funds which invest across all sectors and diversify their portfolio. They invest in large companies to small companies. Which results in wide diversification. It helps in spreading risk across all sectors and return potential is very good.

2. Tax saving Funds (ELSS) :

These are a special category of mutual funds which are tax saving funds called ELSS (Equity Linked Saving Schemes). These have a lock-in period of 3 years. They are Diversified mutual funds in nature.

3. Balanced Funds :

These are the funds that put money in Equity and Debt in some balanced proportion. Balanced does not mean 50:50, it may happen that they put money in the ratio of 70:30 or 60:20 or may be 80:20 … but the ideal ratio would be 50:50. It depends on market conditions.

In a very fast booming market, a fund with 7:30 mat is a balanced one. And in a bearish market, a combination of 50:50 may be considered are an aggressive fund. These funds have low risk and low return capacity in comparison with normal equity funds.

4. Sectoral Funds :

These are Funds that invest all its money in companies of a particular sector or a bunch of sectors related to each other. The reason for this is high faith in the sector for growth and return potential because of which these funds are very risky and have high return potential.

For example Reliance Diversified Power Fund.

5. Mid Cap and Small Cap Funds :

These funds are those funds that invest their money in Midcap Stocks or small Cap stocks … Mid-cap and Small Cap companies are companies categorized by there market capitalization.

  • Large Cap: greater than $10 billion
  • Mid Cap: Between $2 and $10 billion
  • Small-Cap: Less than $2 billion

Mid-cap and Small Cap stocks are riskier as they are small compared to large Cap stocks because of size and reachability in the market. They also have huge potential for growth so they can give superb returns too. For eg:

“Sanghvi Movers” gave a return of around 4500% in 5 years from 1992 – 1997. An investment of Rs 1 Lac was worth Rs 45 lacs in just 5 years.

In the same period “Jindal Power and Steel” gave a return of 20000 %. So an investment of Rs 50,000 was worth Rs 1 crore in just 5 years.

6. Index funds :

Index Funds are mutual funds which mirror a particular mutual fund. They put their money in the companies which are part of that index and in the same proportion as per the weightage of the company in that index. For Eg:

Franklin India Index Fund which tracks S&P CNX Nifty Fund will invest in companies in that fund in the same ratio as their weights. Suppose following is the weightage table for index:

Reliance 10%
Infosys 8%
Wipro 8%
…..
…..
Ranbaxy 3%

Then the fund will also invest in these companies’ stocks in the same proportion. The NAV’s of these mutual funds increase or decrease in the same way as the index. if the index will grow by 2.4% then NAV will also increase by 2.4 %.

7. Exchange-Traded Funds :

ETFs are just like Index funds with some differences, ETFs are a mix of a stock and an MF in the sense that

  1. Like ‘mutual funds’ they comprise a set of specified stocks e.g. an index like Nifty/Sensex or a commodity e.g. gold; and like equity shares they are ‘traded’ on the stock exchange on a real-time basis
  2. ETFs are passively managed, have low distribution costs and minimal administrative charges. Hence most ETFs have lower expense ratios than conventional MFs.
  3. Convenient to trade as it can be bought/sold on the stock exchange at any time of the day when the market is open (index funds can be bought only at NAV based on closing prices)

8. Fund of Funds :

These are mutual funds that invest in other mutual funds. They put money in different mutual funds in some proportion depending on their goals and objectives.

9. Debt Funds :

Debt funds are mutual funds that have their major holdings in secure and fixed income instruments like Fixed deposits, bonds. They also put a small proportion of Equity (High risk, high returns). These are secure in nature and provide low returns.

10. Liquid Funds :

Liquid funds are used primarily as an alternative to short-term fix deposits. They invest with minimal risk (like money market funds).

Most funds have a lock-in period of a maximum of three days to protect against procedural (primarily banking) glitches, and offer redemption proceeds within 24 hours. Liquid funds score over short term fix deposits.

Conclusion –

I hope you have become aware of all these types of mutual funds and now you can improve your investment by considering the funds according to your goal of an investment.

If you have any doubt you can leave your query in the comment section.

How to calculate home loan EMI?

Posted on by Jagoinvestor

Taking a loan on EMI is a good option, but do you know how to calculate EMI? It’s not just about a Home loan, it can be any loan EMI.

In this post I will tell you how does the monthly EMI for Home Loan is calculated and how increasing Tenure does not help much after a certain point.

How to calculate EMI on loan

What is EMI?

EMI is an abbreviation of Equated Monthly Installments. The name itself explains what does it exactly means. It’s a monthly installment that a borrower has to pay to the bank or the financial institute from where he has taken the loan.

This EMI depends upon the principle amount of loan and tenure i.e. years for which the loan has been taken.

How to calculate EMI?

EMI can be calculated on the basis of 3 terms, which are as –

  • Loan Amount
  • Interest Rate
  • Loan Period

The formula for calculating EMI is given below.

home loan EMI formula

Where,

L = Loan amount
i = Interest Rate (rate per annum divided by 12)
^ = to the power of
N = loan period in months

A lot of people do not know that increasing the tenure only leads to increase in Interest amount payable and nothing else . The decrease in EMI is not proportional to the increase in Loan tenure.

In Housing Finance, Equated Monthly Installments (EMI) refers to the monthly payment towards interest and principal made by a borrower to a lender. Have a look at the example given below to get a clear idea about it.

Example

Assuming a loan of Rs 1 Lakh at 11 percent per annum, repayable in 15 years, the EMI calculation using the formula will be :

[su_table]

   EMI   =     (100000 x .00916) x ((1+.00916)^180 ) / ([(1+.00916)^180] – 1)
   EMI   =     916 X (5.161846 / 4.161846)
   EMI   =     Rs 1,136

[/su_table]

Note  at  i = 11 percent / 12 = .11/12 = .00916

You must have got an idea about calculating EMI. Some people think that increasing the tenure of EMI is a good option because it will help to reduce the EMI.

EMI Calculator:

[CP_CALCULATED_FIELDS id=”9″]

Q. How much benefit we get by increasing the Tenure of the Loan. Considering a Loan of Rs 30 Lacs at 12% interest rate.

Ans: I did a bit of my so-called “mathematical skills” … and found out that EMI is of form

EMI(n) = C1 X C2^n / C2^n-1 , where
C1 = L * i
C2 = 1+i

So the difference in the EMI value for n+1 and n is nothing but

by a bit of calculation I got :

EMI(n) – EMI(n+1) = C1 x (C2^2n – C2^n) / (C2^2n – 1)

and when n becomes very large … and applying limit, we get

Lim C1 x (C2^2n – C2^n) / (C2^2n – 1)
-> Inf

=>

Lim C1 / C2^n
n->Inf

and as C2 > 1 (C2 = 1+i)

=>

Lim C1/C2^n = 0
n->Inf

Or in other words, if we differentiate the EMI formula … we get a constant …

It shows and proves that the difference in EMI value is not very significant compared to the change in tenure and at one stage its almost of no gain to increase the tenure.

To show this argument: I would like to present an example, considering my old question:

Q. How much benefit we get by increasing the Tenure of the Loan. Considering a Loan of Rs 30 Lacs at 10% interest rate.

See the table given below. In this table, i have shown how EMI changes with increasing tenure, and also the difference in your old EMI and new EMI you will have to pay after increasing the tenure.

[su_table]

 Period  New EMI  Difference between old & new EMI
 10  39645
 15  32238  7407
 20  28950  3288
 25  27261  1689
 30  26327  934
 35  25790  537
 40  25474  316
 45  25286  188
 50  25173  113
 55  25104  69
 60  25063  41
 65  25038  25
 70  25023  15
 75  25014  9
 80  25008  6
 85  25005  3
 90  25003  2
 95  25001  2
 100  25001  0

[/su_table]

From this table you must have realized that after a particular time there is no sense in increasing the tenure because the difference between your old EMI and new EMI will be in some rupees which is negligible.

So it is advisable not to extend your loan tenure to much just to reduce the EMI.

EMI calculators of different banks

Interest rate on loan is different for different banks. So the EMI you will have to pay is also different from bank to bank. In the table given below, I have enlisted some top banks and their EMI calculators link. Click on the links to check the EMI of different banks.

[su_table]

ICICI bank https://www.icicibank.com/calculators/home-loan-emi-calculator.html
SBI https://www.sbi.co.in/portal/web/home/emi-calculator
Union bank https://www.unionbankofindia.co.in/EMICal.aspx
HDFC bank https://www.hdfc.com/home-loan-emi-calculator
Axis bank https://www.axisbank.com/personal/calculators/home-loan-emi-calculator
Bank if India https://www.myloancare.in/home-loan-emi-calculator/bank-of-india
Bank of Baroda https://www.bankofbaroda.com/baroda-home-loan.htm
Indian bank https://www.indianbank.in/emi_calc.php

[/su_table]

Tips before taking loan on EMI

  • Check the EMI’s of all banks before tanking loan
  • Don’t extend your loan tenure just to reduce the EMI
  • Negotiate with your agent or loan providing institute when you are planning to take a big amount of loan
  • Pay your EMI on time
  • Make sure you have a good credit history and you are eligible for home loan before applying.
  • Do not expect from a sales person in a bank or the institute from where you are lending money to tech you how to use it. If you are taking a house loan then research for all the related expenses on your own and spend it accordingly.
  • And finally, collect all the documents after repaying your loan.

Taking loan is not a bad thing and it doesn’t carry a risk with it, but its only then when you manage it properly. If you have any doubts regarding this information please leave your query in the comment section.