34 terms
Financial glossary
Defined in language you would actually use, and without the circular definitions that send you looking up three more words to understand the first one.
A
- Amortisation
- The process by which a loan balance is reduced to zero through regular instalments. Early instalments are mostly interest; later ones are mostly principal.
- Annuity
- A series of equal payments made at regular intervals. A SIP is an annuity you pay in; a pension is one you receive.
- Asset allocation
- How a portfolio is split across equity, debt, gold and cash. It explains more of a portfolio's outcome than the individual products inside it.
C
- CAGR
- Compound annual growth rate — the single smoothed annual rate that would take a starting value to an ending value. Useful for comparison, misleading about the ride.
- Cess
- A surcharge levied on income tax for a stated purpose. Health and education cess is currently 4% of tax plus surcharge.
- Compounding
- Earning a return on returns already earned. Its effect is negligible early and dominant late, which is why time in the market matters more than size of contribution.
- Corpus
- The accumulated sum available for a goal — most often used for the amount needed at retirement.
E
- Effective annual rate
- The true annual yield once compounding frequency is accounted for. A nominal 7% compounded quarterly is an effective 7.19%.
- Emergency fund
- Three to six months of household outgoings held in an instantly accessible account, not invested and not earmarked for anything else.
- EMI
- Equated monthly instalment — a fixed monthly payment covering both interest and principal on a reducing-balance loan.
- Exit load
- A charge applied when units are redeemed before a stated holding period, typically 1% within a year.
- Expense ratio
- The annual percentage a mutual fund charges to manage your money. It is deducted from returns before you ever see them.
F
- Floating rate
- An interest rate that moves with a benchmark. Your EMI or your tenure changes when it does — usually the tenure.
G
- Gratuity
- A statutory payment made by an employer on exit after five or more years of continuous service, calculated on last drawn basic pay plus dearness allowance.
H
- HRA
- House rent allowance — a salary component that is partly exempt from tax under section 10(13A) if you actually pay rent. Available only under the old regime.
I
- Indexation
- Adjusting an asset's purchase cost for inflation before computing capital gains, reducing the taxable gain. Availability depends on asset class and holding period.
- Inflation
- The rate at which money loses purchasing power. It is the reason a retirement corpus must grow after you stop working, not just until.
L
- Liquidity
- How quickly an asset can be converted to cash without losing value. A savings account is liquid; a PPF account is not.
- Lock-in
- A period during which an investment cannot be withdrawn. ELSS funds have three years; PPF has fifteen.
M
- Marginal relief
- A provision preventing tax from rising by more than the income that triggered it, applied at rebate and surcharge thresholds.
N
- NAV
- Net asset value — the per-unit price of a mutual fund, published at the end of each business day.
- NPS
- National Pension System — a market-linked retirement account with an additional ₹50,000 deduction under section 80CCD(1B) in the old regime.
P
- PPF
- Public Provident Fund — a fifteen-year government-backed savings scheme, exempt from tax on contribution, accrual and withdrawal.
- Prepayment
- Paying more than the scheduled instalment on a loan. It reduces the outstanding balance directly and removes all future interest that balance would have generated.
R
- Real return
- Return after inflation. A 7% deposit in 6% inflation delivers a real return under 1%, before tax.
- Rebalancing
- Returning a portfolio to its target allocation after market moves have shifted it. It enforces selling what rose and buying what fell.
- Rebate (87A)
- A direct reduction in tax payable for incomes below a threshold — up to ₹60,000 in the new regime and ₹12,500 in the old.
- Reducing balance
- An interest method where interest is charged only on the outstanding principal, which falls each month. Standard for retail loans in India.
S
- SIP
- Systematic investment plan — a fixed amount invested at fixed intervals, buying more units when prices are low and fewer when they are high.
- Standard deduction
- A flat deduction from salary income requiring no proof — ₹75,000 in the new regime and ₹50,000 in the old.
- Step-up
- Increasing a SIP instalment by a fixed percentage each year, usually in line with income growth.
- Surcharge
- An additional levy on income tax for higher incomes, beginning above ₹50,00,000 of taxable income.
T
- Tenure
- The length of a loan or deposit. On a loan, extending it lowers the instalment and raises total interest, often dramatically.
- Term insurance
- Life cover with no maturity value. Because nothing is returned if you survive the term, the cover itself is inexpensive.
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