My blog till date concentrated on the most basic and fundamental aspects of the finance industry. Ultimately this blog aims at educating the users with the basics of financial jargaon and then proceed on to the investments, suggestions, reviews and whatever.
In my last attempt, i tried to explain the meaning of insurance and the types of insurance available today. Now we will explore the most talked about concept now a days, that of Mutual Fund.
A Mutual Fund is an investment strategy wherein a professional like a Mutual Fund Manager will gather amounts from the public and the investment organisations in small/ big amounts to invest in stocks of diversified companies. The main aim is to reduce the risk that is associated with the individual stock picks. For ex: I invest, huge sum of money, say 1 lakh in purchasing stocks of a reputed company like Reliance, when the share price is around 1500 Rs. per share. I buy with an intention that the share price of the company will rise in the near term due to the good performance of the company. But due to some external factors, say political, the share price drops to 1000 Rs. per share. I am at a loss of 500 per share, where in total the loss is huge.
The same investment, of 1 lakh, if i make it in a reputed and well performing mutual fund, the investment is diversified as the amount is used to buy stocks of different companies which are supposed to be good performers. Even if Reliance share drops, my other companies can still fare well and the overall value of the portfolio can increase. In this case, the risk is much lower and the chances of creating wealth over long term is better. So, even if the sensex falls, there is no necessity that your investment value reduces.
It is therefore always advisable to invest in mutual funds which have a proven track record.
Saturday, April 19, 2008
Mutual Funds
Saturday, April 12, 2008
What is Insurance?
Insurance is a contract. Before proceeding to the actual meaning of insurance, we will try to understand the basic entities involved. Here the few:
- Payee: A person who opts for an insurance. He is the one who is responsible for the payment of premiums.
- Contract: An agreement into which the payee and the provider enter into.
- Provider: Generally a well known organisation the field of insurance or banks (Banks now-a-days have an insurance wing attached to it)
- The event: The occurrence of some incident against which the insurance is opted for.
So knowing the above terms it is now interesting to know what actually and insurance is. It is contract or an agreement into which the payee and the provider enter into, where in the provider promises to pay a certain amount to the payee upon the occurrence of an event against which the insurance is opted for. The agreement will consist of several terms and conditions which are agreed upon by both the payee and the provider.
Insurance can be bought for almost anything. Below are some of the well known forms of insurance in our present day life.
- Auto Insurance
- House Insurance
- Life insurance
- Travel insurance
Auto Insurance is one thing that is taken for automobiles like cars, trucks, two-wheelers and other modes of road transport. This kind of insurance is taken in view of protection against loss that incur due to accidents. Similarly life insurance provides protection to the family members in case of any eventuality that occurs to the person who is insured.
Active and Passive Investments
These are generally two kinds of investing. The terms "Active" and "Passive" represent the aggressiveness involved in the trading of stocks in the portfolio. The active investments are those where the trading of stocks is so frequent that the aim of the portfolio is to beat the returns generated by the sensex or the benchmark which is corresponding to portfolio. An active investment also represent the involvement of the fund manager in trading. The fund manager in this case is so concerned and so 'actively' involved in the transactions of trading that he is very obsessive of beating the returns generated by the portfolio's benchmark. He is an active member and reviews the portfolio and takes decision for 'buy' or 'sell' very frequently.
On the other hand, "Passive" investment is more with a long term view of generating returns. The involvement of the fund manager is not that intense as compared to the "Active investments". Index funds are one example of passive investments. The portfolio is more like the index which it is referring to.
The risk that is involved in an "active" investment is high compared to that of the passive investment. However, it depends on how good the fund manager performs while taking the "bur" or "sell" decisions.
