Hello everyone, this article mainly covers the 6 basic things of finance that you need to understand in your life, if you are aware of the below mentioned subjects that will help you when you are planning to do some investment or loan.
- Inflation
- Time value of money
- Interest of loan
- Compound interest
- Risk and return
- Diversification of investment
Inflation
Rate of a product or service will increase in year on year. If you are not considering the inflation rate and not investing money in anywhere you will be face the loss.
Suppose if you are investing 1000 rs for 1 year and the interest will be 10% then (1000 *10/100) = 100 and the total amount will be 1100. If the inflation is 5% 1100- 50. That means after deduction inflation amount you will have 1050. But if you are not investing the money in anywhere you will be facing the loss due to inflation.
You have 1000 rs and not investing anywhere so after one year you have 1000 rs in your hand. And if you deduct the inflation rate you will be have 950. So if you are investing the money in a proper way will help you to get more return.
Time value of money (TVM)
Time value of money is one of the factor that you need consider in your life. Suppose if you have a child and you are planning to invest money for their education then you need to remember one thing.
The amount that you need to pay for today will not be equal to the future amount. It happens because of the moneys potentials to grow over a time period. There many factor effecting in this scenario like inflation so you need to consider the time value of money as a factor for investment.
Interest of loan
When you are planning to take a loan then you need to consider certain things. One is interest on loan.
You need to understand how the interest is working. Suppose you are taking 1000 rs for 1 year in 10% of simple interest. Then the interest will be, 1000*(10/100) = 100, and for 1 year 100/12 is your interest for 1 month. In this case e calculate the interest for 1 year.
But in some cases you can see interest rate is 2% per month, you need understand the one year interest will be 2*12 = 24%. This will be higher than the first case. So you need to clear that the interest rate is on per month or per year. Part from these you will be having process fee in usual case. In some cases the customer can opt an insurance on top of this loan.
Compound interest.
When you are planning to do an investment please go for compound interest. How the compound interest will work. Suppose if you are investing 1000 rs in 10 % of interest rate for 1 year, the amount will be1000+( 1000*(10/100)) = 1100 and for the 2nd year the will be 1100+(1100*(10/100))= 1210.
This will continue to the tenure. Compound interest is not good for loan, in this case you need to pay more money compare to simple interest.
Risk and Return
Risk and return have a direct relation. Suppose if you are planning to invest some amount of money you can consider two ways. One is less risk and less return.
If you are investing that amount in a nationalized bank the risk will be very less because it have a control by RBI, but I you are investing the same amount of money in private finance institutions you might get the high interest rate and return as well, but there is huge a risk because of its private sector.
So there will be a direct proportion between the risk and return, if you need to get more return you need ready to take risk.
Diversification of Money
Diversification of money is one of the important factor you need to consider before investing money. Suppose if you have 100000 rs you can invest the amount in many ways to diversify the risk. One of the low risk investment is fixed deposit, there will be less return in fixed deposit, but your risk will be very less and the second one is investing money in share market, and it have huge risk because market always depend on many factors, there will be no guarantee that you will always get only profit. The another way to invest money is Mutual fund, Compared to share market the mutual fund have less risk and still there will be some risk. There is a lots on factors you need to consider before investing in mutual fund. One of the other method is investing in gold, if you are considering for a long term investment gold you can consider one of them. So you can invest your 100000 in different ways some portion of money you can invest in fixed deposit and some of them you can invest in share market and some of them in mutual fund, so you can diversify your risk into different ways