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Debunking Common Jargons in the World of Investment

By HARSH AGARWAL

22nd Mar 2022

4 mins read

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Our claim is, investing is flawed. Not because something is fundamentally wrong with the concept, but because of the seemingly high understanding bar. The argument of a new investor against investing, almost always, is the presence of an intimidating jungle of jargon. Even experienced investors regularly tread waters of abbreviations and numbers that just don’t make sense. Well, we are here to simplify that. Here are the list of common jargons that have been simplified:

AMC (Asset Management Company)

An Asset Management Company is a company that offer mutual funds. Their offerings might include hundreds of such funds meeting different themes.

NAV is similar to the price per share of a company’s stocks. However, unlike stocks, partial units can be allotted to the investors based on the net investment amount.

Direct and Regular Mutual Funds

There are broadly two modes of investing in Mutual Funds, Regular and Direct. The regular implies the presence of a middleman between the investor and AMC, while the latter eliminates the presence of a middleman.

Lumpsum and SIP (Systematic Investment Plan)

One can invest in a Mutual Fund either at once (lump sum) or in a periodic pattern (SIP).

AUM (Assets Under Management)

AUM implies the net value of assets of a particular fund. The magnitude of AUM can indicate different investment strategies for various categories of funds.

Expense Ratio

The AMCs hire fund managers to manage these investment portfolios, which requires them to pay specific salaries and charges. In turn, these charges are taken as commissions from the investors.

Exit Load

Mutual funds often have a lock-in period–no “free” withdrawal before this duration completes. Hence, the investor can redeem the funds before this lock-in period by paying a small percentage of the redeemed amount, known as exit load.

STP (Systematic Transfer Plan)

STP allows the investors to systematically transfer a portion of their investment from one fund to another within the same fund house.

SWP (Systematic Withdrawal Plan)

The investment made in a fund can also be withdrawn periodically. The advantage of SWP compared to complete withdrawal is that the remaining amount in the fund can still generate returns.

ROE (Return On Equity)

ROE refers to the return generated by a company as a percentage/ratio of its net assets. However, ROE must be calculated only when the net assets and returns both are positive.

ROI (Return On Investment)

ROI refers to the return generated on an investor’s investment as a percentage/ratio of the latter. ROE and ROI of a company are equal when the company has no debt.

P/E ratio (Price-to-Earning ratio)

P/E ratio is the ratio of the current market price of a stock and earnings per share.

P/B ratio (Price-to-book ratio)

P/B ratio is the ratio of the current market price of a stock and book value per share.

SGB (Sovereign Gold Bonds)

SGBs are government-backed gold bonds. While the interest payouts and tax reliefs make them the most preferred mode of gold investment, the limited allotment period of these bonds and the high investment barrier make them inaccessible for many small investors.

Gold ETFs (Exchange Traded Funds)

Gold ETFs are backed by actual, physical gold reserves and are listed on stock exchanges. They charge a tiny expense ratio for the investment made by the investor and aim at tracking the prevalent gold prices. The downside of this model is purchasing in multiples of the ETF prices. Investors would need a Demat account for the same.

Digital Gold

Digital Gold is another way of investing in this evergreen asset (Heard of Spenny yet?). One can invest in digital gold with as little as ₹10. This flexibility, combined with the round-the-clock availability, make it a preferred investment model for many new-age investors. Furthermore, digital gold does not require a Demat account for investment.

Independent Trustee

The digital gold providers appoint certain companies or banks as Independent Trustees. The job of such banks or companies is to act as a guardian of the customer’s rights by ensuring that every investment is backed by a corresponding amount of pure gold in the company's vaults.

Phew, that was a lot to cover. We hope you can fare well in this jungle now and make better money decisions. Keep visiting us for more such content!

FAQs

Why is there a difference between buying and selling price of Digital Gold?

The difference between the buying and selling price is called the spread. This is used to pay gateway services, trustees, and various other intermediaries. Apart from this, the GST imposed on buying is not levied on selling which also causes the difference.

Who are fund managers?

Fund managers are individuals or a group of individuals responsible for investing and maintaining portfolios in a way to achieve fund objectives. Fund managers are paid a percentage of the fund’s average Assets Under Management for the same.

What are CAGR and XIRR?

Compounded Annual Growth Rate (CAGR) and Extended Internal Rate of Return(XIRR) are two parameters used to measure fund returns over a period of time. While CAGR is usually used to represent annualized returns on a lumpsum investment, XIRR measures the returns generated by SIPs or periodic investments.

What are indices and index funds?

An index uses a standardized method to gauge the performance of a section of assets. Index funds aim to replicate these very indices and often tend to have a lower expense ratio.

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Made with ❤️ in India