Financial Concepts for Beginners

In this article I shall provide a summary of those financial concepts for beginners that I have covered in August.

Earlier in the articles Popular Financial Products in India – July and Popular Financial Products in India – June, I had provided a summary of financial products that I had discussed in the last 2 months.

There are different types of financial products available in India. They all belong to three main categories – equity or shares, debt or bonds and insurance.

Equity
I covered two financial concepts which go hand in hand – Systematic Investment Plan (Mutual Funds) and Rupee Cost Averaging. Apart from that I also provided an introduction to Index Funds.

Debt
I discussed 5 differences between NSC and PPF.

Insurance and Pension
In this category, I talked about the different types of life insurance in India.

Systematic Investment Plan

A Systematic Investment Plan, also known as an SIP, is an investment strategy offered by mutual funds to investors. An SIP allows an investor to invest small amounts of money regularly rather than investing a single large amount.

An SIP is a flexible and convenient investment option.

  • Systematic Investment Plan allows an investor to invest in a disciplined manner.
  • An SIP helps an investor to invest regularly.
  • Systematic Investment Plan is very convenient for those who cannot afford to invest lump-sum.
  • An SIP helps to reduce losses in a downward market because of rupee cost averaging.

Read more here at Systematic Investment Plan Overview.

Rupee Cost Averaging

Rupee Cost Averaging is an investment technique that helps to reduce the impact of volatility on purchases of equity or equity like products. Rupee Cost averaging is known as dollar cost averaging in the US, pound cost averaging in the UK and unit cost averaging in general.

In a Rupee cost averaging strategy, an investor divides his total planned investment amount (say Rs 60,000) into equal amounts (for example Rs 5,000), and invests the amount periodically over a certain period (12 months).

Rupee Cost Averaging helps in 2 ways.

  • In a falling market, rupee cost averaging helps in minimizing downside risk.
  • In a rising market, rupee cost averaging reduces upside potential but provides the convenience of investing in small amounts, when one does not have the full amount readily.

The technique is called Rupee Cost Averaging as it can potentially reduce the average cost of shares bought in a falling market.

Read more here at Rupee Cost Averaging Introduction.

To understand all the advantages of rupee cost averaging read about the benefits of rupee cost averaging.

I have also discussed the pros and cons of SIPs versus Recurring Deposit (RD) in this article.

Index Fund

An Index Fund is a type of mutual fund that invests in a specific set of stocks of an index likeBSE Sensex or NSE NIFTY in the same proportion as the index.

For example, let us assume that a sample index consists of three Stocks, Stock A, Stock B and Stock C in the proportion of 45%, 35% and 20%. An index fund with a corups of say Rs 100,000 (RS 1 lacs) will invest Rs 45,000 in StockA, Rs 35,000 in StockB and Rs 20,000 in StockC.

An Index Fund is an example of Passive Investing.

Read more about index fund in this article Index Fund in India – An Introduction.

In a separate post, I have analyzed the 15 year performance of Franklin India Index Fund.

Franklin India Index Fund Nifty Plan is an index fund which tries to attain results which are similar to NSE NIFTY. An Index Fund aims to deliver market returns by investing in a specific set of stocks of an index like Sensex or NIFTY in the same ratio as the index.

In the article I have done an analysis of Franklin India Index Fund Nifty Plan returns over various time periods for different duration like 1 year returns, 3 year returns and so on.

Get details of the analysis on Franklin India NIFTY plan here.

Differences between NSC and PPF

Both National Savings Certificate (NSC) and Public Provident Fund (PPF) are good tax-saving investment options in India, allowing tax deductions under Section 80C. Both NSC and PPF are government backed products and have very low risk and assured returns.

So which one is a better option, NSC or PPF? Should you invest in NSC or PPF?

To answer this question, we discussed the difference between NSC and PPF in terms of different parameters like structure, type of investment, investment horizon, returns and tax aspects.

Read more about the 5 differences between PPF and NSC.

Type of Life Insurance Products in India

Different types of life insurance policies are available like term insurance, endowment policies, money back policies, whole life policies, group plans and ULIPs.

To know more about these life insurance products in India read this post.

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A Few Last Words

That’s it for today. Hope you enjoyed this discussion on financial concepts for beginners .

Before making any investment decision, please contact your financial adviser.

  • I do not own any mutual fund.
  • I am not registered with SEBI under SEBI (Research Analysts) Regulations, 2014. I do not offer any opinion concerning securities or public offers. Whatever analysis I provide is through public media only on Mkerj. I am not covered under RA Regulations.
  • I have provided this article for educational purpose only.

I hope you found this wrap up on financial concepts for beginners useful. If you have something to add please leave a comment in the post. Please feel free to contact me.

Subhodeep Mukhopadhyay

I am a Management Consultant in the Education Sector. In my previous corporate career, I have worked in Banking, Private Equity and Software industry. I am an MBA in Finance/ Computer Engineer and enjoy doing equity research and financial analysis in my free time.

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