DISTINGUISHING FINANCIAL TERMS
1. Saving
· If you have idle cash in your bank savings account or at any other place, you are saving money.
· It does not grow since you don’t get any interest on it and can only meet your short-term goals.
2. Investing
· When you invest, you make your money work for you.
· You put it in an instrument to earn a return at a certain rate of interest after a specified period.
· Since the amount grows over a given time frame, you can use it to fulfill your long-term goals.
3. Fixed Deposit
· It is a lump sum deposited in a bank for a fixed term at a specified rate of interest.
· The longer the term, the higher the interest.
· You can be penalized if you withdraw before the stipulated time.
· The interest is taxable every year, and the bank can deduct tax at source above a limit.
4. Recurring Deposit
· If you don’t have a lump sum, but can spare some every month, you can put it in a recurring deposit for a pre-decided period at a fixed rate.
· If you default, you may have to pay a penalty.
· You will have to pay tax on the interest earned every year on this deposit.
5. Term plan
· It is a means to ensure that your family doesn’t suffer financially if you die suddenly.
· It’s a life insurance policy wherein you pay a fixed amount (premium) to the insurer every year for a fixed term, with assurance that it will give a lump sum to people designated by you in case of your death.
· You don’t get any cash at the end of the term upon survival.
6. Ulip
· It insures your life, and also invests your money in the stock market for a fixed term.
· However, it is more costly, that is, you pay a higher premium, than a term plan since the company charges you to invest the money in the stock market.
· It is also riskier since it is linked to the volatilities in the stock market.
7. Stock
· When you buy a stock or share of a company, you become its part owner and have a right over its assets and earnings.
· You can buy or sell stocks on an exchange either yourself or via a stock broker.
· Since buying or selling is your decision, the stock needs continuous research and monitoring.
· Short-term returns can be high, but the associated risk is also greater.
8. Mutual fund
· If you entrust a fund house to buy and sell stocks on your behalf, you invest in a mutual fund.
· You can put in a lump sum or invest periodically (via Systematic Investment Plans).
· It doesn’t require very active monitoring since a fund manager is doing it for you.
· You may not earn as well as you would through stocks, but the risk involved is also lesser.
9. Short-term capital gain
· If you sell an asset within 3 years from the purchase date, the gain or loss on the sale is short-term in nature.
· In case of shares, mutual fund units and debentures, this period is taken as 1 year.
· You have to pay tax on short-term gains, with the profit being added to your income and taxed at applicable rate slab.
10. Long-term capital gain
· If you sell an asset after 3 years from the date of purchase, the gain or loss is long term.
· You are taxed at 10% on these gains (without indexation) and 20% (with indexation), but can reduce the tax if you re-invest the proceeds in specified assets.
· As for stocks, mutual funds and debentures, this period is 1 year and profits are exempt from tax if you have paid the Securities Transaction Tax (STT).
11. Credit card
· It is a card issued by a bank or a financial institution, which allows you to make purchases and pay later by a specified date.
· You are allowed credit, usually 20-60 days, after which you can either pay fully or partially.
· In case of the latter, you will be charged an interest, which is very high, between 20-40%.
12. Credit score
· It determines your financial and credit health and is given on the basis of your credit history (i.e. credit and loan payments).
· The higher your score, the more the chance of your loan application being approved.