Financial Literacy: Are you clear about investing?

By: | Updated: August 11, 2016 5:24 PM

Financial literacy: It is an essential requirement for the efficient functioning of our daily lives while preparing us for the future.

Exfo Asia Pacific, IMCD India Pvt Ltd, Fincare Business Services, Laurus Labs Pvt Ltd are among the foreign investment proposals listed before the FIP. (Reuters)

Financial literacy: It is an essential requirement for the efficient functioning of our daily lives while preparing us for the future. (Photo: Reuters)

Financial literacy is about having the faculties to make educated decisions about money.

It is an essential requirement for the efficient functioning of our daily lives while preparing us for the future. A few can call themselves financially literate, but many of us do not adequately understand key monetary concepts.

Not understanding investing, the risks it carries, and the laws that govern the use of investment tools could be detrimental to your financial health. Therefore let us go through some basic facets of financial literacy.

1. Income, Expenses and Budgeting:

The first and fundamental step for being financial literate is setting a budget and fixing priorities. Prioritising expenses will help you distinguish between your needs and wants – a critical step towards minimizing wasteful expenditure.

Planning and budgeting then help you balance your expenses with your income. Once done, you will know how much money is left over that can be used for savings.

2. Charting out Financial Goals:

To reach a goal, we need to know the road to the destination, else we will be lost. Similarly, to manage your money well, you need to know where you want to go. Hence, it is vital to set short, medium and long-term financial goals.

3. Savings:

Savings are crucial. If you do not save, you will have to borrow money or take loans to meet your purchases or sudden monetary requirements. Borrowing is expensive as we have to pay back the money with interest.

If you save consistently, you can avoid the interest that you have to pay on borrowed money.

Now that you know the importance of savings and have decided your financial goals, all you need to decide is how do you go about it.
Savings can be divided into short, medium and long term. Savings secure your future financially. So, the earlier you start, the better it will be. Keep these few tips in mind while saving:

• Eliminate your debt
• Set Savings goals
• Pay yourself first
• Make regular contributions to your savings
• Create an interest-bearing account
• Schemes like EPF, PPF, NSC, ELSS, NPS, etc. are the good way to reduce taxes

Now, moving on to more complex facets of where to put your money and secure your future.

1. Where And How To Save:

There are numerous ways you can save. It can be as simple as making a savings account. It can be a recurring of fixed deposit account, or you can choose post office schemes. Every option has its advantages and limitations. So, choose the one that fulfils your requirements.

2. Credit and Debt Management:

Many people borrow money or take loans for expenses like buying a house, a car or for their child’s education. This is known as credit.

There’s good credit and there’s credit that erodes your wealth. Credit taken to build appreciating assets such as a property help you increase your net worth. Credit taken to finance a depreciating asset such as a mobile phone or a loan to pay monthly expenses should ideally be avoided.

It is often easy to keep going on spending without realizing how much our debts have piled up. Our finances could easily spin out of control if we’re not careful. People who use credit cards extensively often experience this. The first step towards resolving this monetary problems is to admit that it exists, and then take control of it.

You need to have control over your desires so that you do not get carried away. If you want to buy something and do not have enough funds at the moment, you will get numerous offers from credit card companies offering loans for the same; but you need to be firm and learn to ignore such temptations. Do not fall for glorified pitches by credit companies. Instead, make a goal to save so that you have enough to buy what you desire.

In case you have to borrow money, ensure that it is done as per your financial capacity. Always remember that you will also have to pay interest on the borrowed money. Borrowing beyond your means may lead you into a debt trap. Always remember that the interest on borrowed money is an extra expense, and can sometimes amount to a huge added sum.

3. Insurance:

Emergencies can knock at your door anytime, so it is always better to be prepared to face them. Insurance is a great way to protect yourself and your loved ones from monetary troubles. People mostly buy traditional life insurance schemes as they aid in tax saving, give insurance support, as well as take care of investment needs.

However, many are unaware of the fact that such plans give them only 6%-7% returns a year, an amount which may not be enough to sustain all of an individual’s long-term financial goals.

Choosing a right insurance plan that suits your requirement is very important. The benefits and risks associated with that plan are equally important, so that we do not get any last minute shocks when we make a claim.

Invest in good health insurance, child education schemes, vehicle insurance, etc. to avoid long term hardships.

4. Investment:

Investment is the most crucial aspect of financial literacy. It can be complex and often has risks. Arm yourself with knowledge so that you can choose what level of complexity and chance you can comfortably risk. Do not stick only to the traditional investments methods.

Investment can be divided into three key factors – Return, Risk and Liquidity

Return is the profit that you get on an investment.

Risk is uncertainty, which means that an investment can either give high returns or may turn out to be a loss.

Risk and return are two sides of the same coin and go hand in hand. Higher the return, more the exposure to risk.

The ease with which you can convert an investment into cash, at or near current market prices, is known as liquidity. Stocks and governments bonds are liquid as they can be sold off at short notice.

5. Investing Goals:

Investment goals differ from individual to individual as well as at different stages of life. If you are young you can take more risk, as compared to someone with family and more responsibilities. If most of your family members are independent, then you will need minor short-term savings. It will give you the opportunity to save more for your retirement.

6. Diversification:

The total aim of diversifying is not to put all your eggs in the same basket. Allocate your money in different investments – equity, gold, fixed deposits, real estate, debt, etc. – based on your needs, risk-taking ability and age.

Diversification of your ventures in such a way can help limit losses you might incur if one or more asset fails to perform well.

7. Equity:

Equity is also known as the stock or share in a company that you hold. When you buy a share, you become a part-owner of that company. When the company reaps profit, you get your share of it.

Investing in equities is riskier and demands more time than other investments. For beginners, it might be better to invest in the stock market via mutual funds, which are professionally managed and are less costly.

8. Mutual Funds:

A mutual fund is an investment fund that is managed professionally. It is created by pooling money from many investors. Mutual funds are used by fund managers to invest – on your behalf – in short-term money-market instruments, bonds, stocks, other securities or assets, or a combination of such investments.

Buying a mutual fund unit is simple and easy since many banks sell these. The minimum required investment amount for mutual funds is lesser than investing directly in the economic market.

Before investing, remember the adage that ‘if an offer is too good to be true, it probably is’. Also, be sure to find out if the product or company you are investing in is a registered entity engaged in legitimate business.

9. Know The Charges

Different fees may be charged by different issuers and sellers of financial products. These fees determine not only the cost of purchase of a scheme, but also affect the long-term returns of the plan. Therefore, it is essential to know how much you are being charged and for what.

Most bank services are chargeable – loan disbursals, online money transfers, etc. These can have a huge impact on your monetary outgo.

Similarly, insurance, mutual funds, unit-linked insurance schemes and other such investment products come with multiple charges like mortality fee, fund management fee, distributor’s fee, etc.

In most cases, you have to pay brokerage amounts and Demat charges for buying shares in a company.

Registration, taxes and brokerage costs are also incurred in real estate transactions as well as while buying gold.

10. Tax Implications:

Tax can impact your investment immensely. It can take away a big chunk of your investment if you do not plan well.

Returns from investments – capital gains, interests and dividends – fall within tax liabilities. Then there is the bevy of stamp duty, service tax, and securities transaction tax (STT).

While some expenses like STT and service tax cannot be scrapped from, you can tweak your portfolio to lower the tax on interest or capital gains earned.

All you need to know is the applicability (or non-applicability) of tax on different financial products.

11. Retirement and Pension Plans:

After working for a whole life, everyone looks forward to a happy and secure retirement. To achieve this goal, it is very important to invest in pension plans.

It may be hard to put aside money for later, but this an investment that should not be neglected.

While investing in a retirement plan, you need to figure out how much money you will need after retirement. Consider your life expectancy, market inflation trends, as well as your retirement age when calculating your post-retirement needs.

12. Financial Planning:

Financial planning is more than making your retirement financially secure. It is about setting goals and designing how you can achieve them to lead the life you want.

Choose investment plans that you can adjust when changes occur in your life.

Financial literacy needs to be an important aspect for everyone. It is like paving the way for a smooth ride in life. Hence, it is important to set every stone carefully. It means, to get good returns on your investments, it is important for you to understand all the financial components and their implications and roles in your ventures.

The author is CEO of

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