1) Difference between savings and investments?
Savings involve placing money in safe places with close to 100% guarantee for the money. The money can be redeemed any time. Example, Savings Bank Account, Fixed Deposit etc. They are characterized by low risk and low returns. The focus here is to protect the principal.
Investments involve pumping money into prospective revenue bearing areas like share markets, bonds, derivatives, land etc. These cannot be immediately converted to cash. They are characterized by high risks and high returns. The focus here is to generate value with the principal.
Generally money spent to buy a product or a service is considered as expenditure. But, if a product has a resale value more than the cost price or it is bought with an intention of selling it at a later date for profit, then we can call it an investment as well.
2) When should I start investing?
a)I have high disposable cash which are not required immediately.
b)My cash is not yielding any productive value to me.
By investing in shares / bonds / land with careful study of the investing area, profits can be made with calculated risks.
3) Should I buy insurance using term plan or endowment?
In a term insurance plan, the individual taking the policy pays a lower annual premium for fixed number of years. In case insured person dies before the end of the term, the kin of the individual receives the money quoted in the insurance plan. If the insured person survives till the end of the term no money will be paid.
In an endowment plan, the individual taking a policy pays a relatively higher annual premium for a fixed number of years. If the insured person dies before the end of the term he gets the money quoted in the plan. If the insured person survives till the end of the term still he gets the quoted amount.
Both schemes have their own merits with the former scheme being riskier; an individual takes a decision based on his / her age, health condition etc.
4) What are Open ended funds?
They are mutual funds were investors can buy and sell units at any point of time. Investors have high liquidity in such schemes.
5) What are close ended funds?
They are mutual funds were investors buy units only during the launch of the scheme and can sell the units only at the maturity of the scheme.
6) What are equity funds?
These are mutual funds were investments are made primarily in the stock market. Fund managers have their own strategies like:
- Invest in stocks that have an appreciating price for the past few days
- Sector specific investments like; invest only in banking stocks, telecom et al
- Research & Development on company?s Balance sheet, P & L, Cash Flows, AGM reports et al
- Rely on Company?s ratings by firms like Moody?s, Standard & Poor et al.
These schemes have greater risk and greater anticipated returns. These are suitable for investors looking for long term gains.
7) What are money market funds?
Big corporate depend on debt / equity market for their long term fund needs and money markets for short term needs. Money market funds are mutual funds were investments are made in safe investment tools like treasury bills, government securities, commercial papers, certificate of deposits and inter-bank call money markets. These are short term low appreciation schemes suitable for investors who want to park their money for short period of time.
8) What are debt funds?
These are mutual funds meant to provide steady flow of income to investors. The fund is invested primarily in equities, government securities, corporate debentures, bonds and money market instruments. This scheme is characterized by low risk and low gains. Change in the interest rates in the country can impact the net asset value of this scheme.
9) What is expense ratio in mutual funds?
For running a mutual fund certain expenditure is involved like payment to staff, electricity, telephone, land rents etc. The ratio of funds? total expenditure to the net asset value of the fund is called as expense ratio.
10) What is CAGR?
The compound annual growth rate (CAGR) is a useful measure of growth over multiple time periods. It can be thought of as the growth rate that gets you from the initial investment value to the ending investment value if you assume that the investment has been compounding over the time period.
11)What is compounding?
Compounding means the ability of an asset to generate earnings which are then reinvested in order to generate their own earnings. In other words, compounding refers to generating earnings from previous earnings.
12) What are shares?
A share represents one of the equal parts into which a company's capital is divided. It entitles the holder to a proportion of the profits of the company. It also denotes a proportional ownership in a company. Shares are also referred to as equity shares which can be purchased by public through Initial Public Offering or traded on share market, only if the company is listed on exchange. These shares have voting rights and the least preference in the eventuality of liquidation of the company.
For example, A company has a total worth of 10 crores. It raises another 10 crores through floating 10 lakh shares each costing Rs. 100. I have 5 lakh shares which mean, I have 25% stake in the company.
Total worth of the company is 20 crores. 5 lakh shares X face value Rs. 100 equals 5 crores. Holding 5 crores in a company worth 20 crores equals 25% stake in the company.
13) What are preferential shares?
They are shares purchased through private placements within the industry. Preferential share holders do not have voting rights. These shares have preference to equity shares in the eventuality of liquidation of the company.
14) What is a primary market?
It is the market were public can buy shares of the company issued for the first time. Here the shares are bought directly from the company. Usually, companies raise money from the primary market through IPOs, FPOs and rights issue and invest it in their business. Unlike secondary market it is not a physical exchange.
15) What is a secondary market?
It is the market where already issued shares and securities are traded on exchange by public. Here public does not buy or sell from the companies directly. In secondary market shares are traded at market value and not at face value.
Example Bombay Stock Exchange, National Stock Exchange
16) What is an IPO?
Whenever a company intends to raise money from the share market for the first time, it offers an Initial Public Offering (IPO) to the public. Through this interested people buy shares at face value from the primary market, i.e. from the company directly. When company wants to raise further funds they do a Follow on Public Offering (FPO).