Simplifying Financial Jargon Used by the Layman!

Published: December 16, 2012 at 4:27 pm

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Wait a minute! Jargon and Layman don’t go together, do they? Yes they normally don’t. However in the financial world many investors seem to using phrases without being clear about their meaning. Unfortunately sometimes even the ‘experts’ do. Here are a couple:

  1. “I want to invest Rs. X for Y years to get the best returns”: I once gave a stick to my 2.5 year old and asked him if it was long or short. He was puzzled. It then hit me. You need to two sticks to make a comparison. Same goes for returns. Best returns with respect to what?

Best in the sense that for short-tem goals (< 5 years) returns will at least match inflation with the lowest tax outgo and for long-term goals (> 5 year) returns will beat inflation with the lowest tax outgo. Return here refers to net return of different instruments in a diversified portfolio and not a single instrument which seem to be the thinking of most investors.

  1. “You must always exit from an underperforming mutual fund”: Experts use this more often than the investor but investors too keep repeating it like a mantra.  Again the question is underperformance with respect to what? There are several parameters; wrt funds benchmark?, wrt funds peers in terms of short-term returns?, long-term returns?, star-rating?

In my view, none of these. Underperformance has to be judged only with respect to the conditions used for defining the financial goal in particular the rate of interest assumed. As long as a MF provides annualised returns comfortably above this assumed rate of interest I will not worry if its star rating fell by one or two stars. With respect to my goal the fund is not underperforming and I will continue to stay invested in it.

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Equity mutual funds are meant for long-term investing (>5 years.) So what is the point of publishing and studying weekly or monthly returns!? Star ratings are also short-term indicators. Star-rating is a comfortable starting point to evaluate a MF there are so many more factors to be kept in mind (more on this later).

  To be continued ….

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Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice.
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