Diversification is a key principle in personal finance and investing. It involves spreading your investments across different asset classes, such as stocks, bonds, and real estate, to reduce risk. By diversifying your portfolio, you can minimize the impact of any single investment on your overall returns.
Expense ratios are an important factor to consider when choosing mutual funds or exchange-traded funds (ETFs). These ratios represent the cost of managing the fund and are expressed as a percentage of the fund’s average net assets. Lower expense ratios mean more money stays invested in the fund rather than being paid out as fees.
Asset allocation refers to how you divide your investments among various asset classes. This decision is based on factors like your financial goals, time horizon, and risk tolerance. A well-diversified portfolio will have a mix of assets that align with these factors.
Active vs passive management is an ongoing debate in the world of investing. Active managers aim to beat the market by actively buying and selling securities based on their research and analysis. Passive managers, on the other hand, seek to track a specific benchmark index and have lower expense ratios since they require less active management.
Benchmark indices serve as yardsticks for measuring performance. They represent specific sectors or markets against which investment returns can be compared. Tracking error refers to how closely a fund’s performance matches its benchmark index.
Net asset value (NAV) represents the per-share value of a mutual fund or ETF at any given time. It is calculated by dividing the total value of all securities held by the fund minus liabilities by the number of shares outstanding.
Dividends and capital gains distributions are payments made to investors from income earned through dividends or profits gained from selling securities within a fund’s portfolio.
Morningstar ratings provide investors with an indication of a mutual fund’s historical performance relative to its peers within its category over different periods.
Sector funds focus specifically on one industry sector such as technology or healthcare. These funds can be more volatile and carry higher risks due to their concentrated exposure.
Bond funds invest in fixed-income securities such as government or corporate bonds. They are generally considered less risky than stocks and provide a regular income stream through interest payments.
International funds allow investors to diversify their portfolios by investing in companies based outside their home country. These funds offer exposure to different economies, currencies, and market conditions.
Growth vs value investing represents two different strategies for selecting stocks. Growth investing focuses on companies with high growth potential, while value investing looks for undervalued stocks that may be trading below their intrinsic value.
Exchange-traded funds (ETFs) are similar to mutual funds but trade like individual stocks on stock exchanges. They offer diversification, low expense ratios, and the flexibility of buying or selling throughout the trading day.
Target-date retirement funds automatically adjust asset allocation over time based on an investor’s target retirement date. These funds become more conservative as the target date approaches, reducing risk exposure.
Risk tolerance assessment helps determine how much volatility an investor can handle without becoming uncomfortable. This assessment is crucial in determining the appropriate asset allocation for an individual’s investment portfolio.
Fund prospectus provides detailed information about a specific mutual fund or ETF including its investment objectives, strategies, fees, historical performance, and risks associated with investing in it.
Rebalancing involves periodically adjusting your portfolio back to its original asset allocation targets. It ensures that one asset class does not become overweighted due to changes in market values over time.
Tax efficiency refers to minimizing taxes on investment gains by using tax-efficient investments such as index funds or ETFs that have lower turnover rates compared to actively managed funds.
Systematic Investment Plan (SIP) allows investors to contribute a fixed amount regularly into a mutual fund at predetermined intervals like monthly or quarterly. This disciplined approach helps individuals build wealth gradually over time while benefiting from rupee-cost averaging