Top 10 Financial Concepts You Must Know | CA Rachana Ranade #Finance

Hey folks, CA Rachana Ranade here, and I welcome you all to a very important CashNews.co, which is about top 10 financial concepts, that you must know. So, whenever we start our Financial Planning journey, I think the very first thing that you must know is, how much money

do you have right now, versus what is your target? If you have these two defined points, then will you be able to bridge the gap between these two, okay? So, I’ll give you a simple example of how much money I have. It could be either money or something which is money’s worth, okay. So,

assume I have a Ferrari, uh a helicopter, uh an airplane, uh a ship. Rachana please, please, please, control Rachana. Okay, anyways… okay so and these are worth just what 10,000 crores, okay and assume that for that I have taken a thousand crore Loan, okay. Then how much

money or money’s worth do I have? It’ll be 10,000 crores minus 1000 crores. Is there any technical term for that? Exactly, that is nothing but Net Worth in financial concepts. So how do I calculate Net Worth of any person? Net Worth is

calculated as Assets, minus Liabilities, okay. So just to give you one more amazing example, Mr. Mukesh Ambani’s Net Worth, I was reading last month is just 96.4 billion dollars. Uh, that’s how it looks like. Now just multiply this with the

exchange rate, uh, and just count how much zeroes they are. It’s actually seven lakh twenty-three thousand crore rupees only. Let me remind you all one more time, that all these creative people are spammers. That’s how my account looks like. Also, remember I never give my mobile number

in any chat. I neither have an advisory nor do I give any stock tips. Now here we have Mr. Chandu, who is completely charged up. He has calculated his Net Worth, and he has also calculated his target Net Worth, but oh my god! just have a look at his face!

He’s worried, he knows that there are a lot of uncertainties that surround him. How can he have a good shield against those uncertainties? Number one, he should buy a life Insurance, and number two, a health Insurance. In simple words, life

Insurance will protect his family members if something happens to him, something happens to him. I had to introduce a certain person in our example because otherwise, I would have to say that if some… okay, anyways. So I hope you’ve understood the importance of life

Insurance. Basically, if the main bread earner of the family passes away, unfortunately, then the nominee, heir will get money, so that the family members can survive. Okay, that’s a simple example of a life Insurance you can have. A life

Insurance though maybe a term Insurance or an endowment policy or a whole life policy. Many many types are there, but my personal favorite is a term Insurance because it’s a pure Insurance product. I hate mixing up

Insurance with Investments. Right, so I hope life Insurance is clear. Second one is a health Insurance. Now, what if Mr. Chandu who is back again, come back into the picture. Chandu now is absolutely again pumped up, because he has

the shield with him. Uh, he does not I mean he doesn’t die, but he falls sick, okay. Then who will cover up for his medical expenses? Okay, it can be the hospitalization expense, it could be about the tests which he has to get himself, or third could be the post-hospitalization expenses. For

that is there is a separate Insurance policy. Exactly that is nothing but the health Insurance policy. It also comes with multiple riders, which can help you to get yourself covered with many many types of related expenses, right. Now with this, I’m sure there is

one last question in your mind, that are these very expensive or not? I’ll give you a simple example and a simple and amazing website through which you can get yourself insured. The name of the website is policybazaar.com. On that website, you’ll get to you know select from a lot of

Insurance policies which are available, but just to give you an example, you can cover yourself up to one crore rupees with just 400 rupees 411 rupees per month, and you can also get a tax benefit up to 46800 rupees if you’re into the 30 percent tax lab. The policies also

cover covid 19 protection and also you will get a protection up to 99 years of age. Well, this was about term Insurance, but then what about health Insurance? Even on again on the same website policybazaar.com, you can get up to, I mean, whatever cover you want,

but if I’m giving an example of 5 lakh rupees health Insurance, you can get that with just 200 rupees per month, premium amount, and tax benefit will be up to 75000. Of course, provided you are into the 30 percent tax lab. Policy bazaar people claim that their specialists will

come to your home or to the hospital within 30 minutes to support your health Insurance claim. Uh just in case if you don’t know about this, policy bazaar earlier was just an Insurance aggregator. Now they’re an Insurance

Broker. If you don’t know about these two terms, and you can surely check out this CashNews.co which is about policy bazaar IPO. I’ve also covered in detail what is term Insurance. What all things you should know about term Insurance in

this CashNews.co and if you want to know more about health Insurance this is the CashNews.co in which I’ve covered everything about health Insurance. Have a look at Chandu’s face, huh so happy he is. Why? He has protected his life, he has protected his

health also, but what if Chandu loses his job? What if certain unplanned expenses all of a sudden pop up? Then what? Isn’t he a bit worried now? Don’t worry Chandu, for that I’ll tell you what is the solution. For that a person like Chandu, or anyone ideally should have an emergency

fund. What’s an emergency fund? It’s a pool of fund which you keep aside to meet for unplanned expenses and unplanned things that can happen in your life. Example loss of job, how much money should you have in that emergency fund? That should be nothing but six months of your expenses

just as a quick example, assume that I spend fifty thousand rupees per month. I should have an emergency fund of fifty thousand, multiplied by six, that is three lakh rupees in the emergency fund, but uh where should I park that money? Should I keep it in cash, or in a saving bank account or what,

is exactly what we’re going to talk about in the next part of the CashNews.co? Well now we know very much about what is an emergency fund, but the question is that, this emergency fund money required where should I park it? Can I park it in cash? Yes. Can I park it in saving account? Yes. Can

I park it in fixed deposit? Yes. Can you park it in a liquid mutual fund? Yes. Now all these four Assets that I talked about right now, have a certain characteristic, which is inbuilt around all of them. Which is that characteristic? That is nothing but Liquidity.

It has got nothing to do with solid, liquid, gaseous, or something like that, okay. Liquidity in simple words means, that any asset which can be easily converted into cash, simple. Now I’m sure everyone knows what is cash? what is saving account? Fixed deposit also, you can

easily convert into cash. You’ll have to bear a penal interest, but you will get the money quickly, but what’s a liquid mutual fund? That is one small point I would like to tell you. Liquid funds are class of Debt funds, that predominantly invest in high-quality fixed

instruments, that mature within 91 days, but where does your money get parked in a liquid mutual fund? That gets parked into instruments like certificates of deposits, Treasury bills, commercial papers, but if you want to know more about liquid mutual funds, that’s the

CashNews.co that you can refer in to, and I hope you have understood what is a classic example of Liquidity. Well, the next financial concept is also very important, because that can really pull you away from your target networks, and what is that concept, that is

Inflation in simple words. Okay, so I’ll give you a very simple example on what is Inflation. Assume, that this fruit basket was costing you 100 rupees a year ago, and today the same fruit basket is going to cost you 120 rupees. What is the

Inflation? It’s nothing but 20 percent, as simple as that, okay. If I if I talk about the real data in India, then have a look at this chart. Uh earlier way back in 90s the Inflation used to be around 13.48 percent, then it started cooling down and down and

lowest point you can see in the recent past is somewhere around 2016 to 18. You can see it was as low as 3.6. Right now, in 2020, 2021 somewhere around our Inflation uh as per the latest data is around 5.56 percent, okay. Now, uh, why is this figure important for me? This figure is

important because I have to compare my Investments with Inflation. If my investment is giving me four percent return, and if Inflation is at 5.5 percent, am I going to get a real return, or no? Answer is no. So, I must ensure that the return on

Investments is higher than the Inflation rate. I hope you have understood the simple concept of Inflation. Now that you have understood what is Inflation, now you are really interested to know that how can I find out an asset

class, which beats Inflation. For that, you have to know a very important term, which is returns for a layman. For CARR viewers, it is CAGR. Okay what is CAGR? Compounded annual growth rate, and first let’s understand the simple definition of CAGR. It is the rate at which an

investment grows from the beginning to the end, assuming that the Profits were reinvested at the end of each period of the investment life span, okay, very simple, right. Now have a look at this formula. If we divided by PV raised to the power 1 by n minus 1. So our definition was

easy, formula was simpler, right? No? Okay, have a look at this example on CAGR, and I’m sure by the end of this example, you’ll be like, yes. Okay, so you can see period one, two, zero, one, two, three, four, five. What is period zero? It means today, okay. Zero generally is today. One at

the end of first year, two at the end of second year, okay. Zero, one, two, three, four, five years are given, and we are also talking about Revenue, or let us say investment amount. Whatever can be replaced with that. So, in simple words what has happened? Today, that is year

zero, period zero. I invested ten thousand rupees. At the end of year one this ten thousand became twelve thousand, okay. At the end of second year, it became thirteen thousand five hundred, and so on and so forth. Now if you check out the growth rate, uh, column you will see that at the end of

first year, the rate of return was 20. Second-year 12.5 percent, third-year minus seven-point four percent. So it’ll be like instead of giving all these different different numbers, can’t you give us a single number, which is a representative number, and you say that over a period of

last five years this investment grew on an average at this this rate, correct? So, this representative figure which talks about on an average, this investment grew at x y z rate, is nothing but CAGR. So, from the beginning of the period to the end of the period, we are talking about, okay.

That’s how we are going to calculate CAGR, but then comes a big problem. Are we going to put all these figures in the formula? Not required. Just visit my website rachanaranade.com. Then you can go to the calculator section. Once you enter that section, you will have to click on that CAGR

calculator, and that’s what you have to put up. You have to pull up the initial amount. In our example, it was ten thousand. You have to put the amount at the end of five years. That was sixteen thousand five hundred. Then you have to put out how much number of years. In our example, it was five

years, and what is the answer? Exactly, that’s the answer. Is this number beating our Inflation figure? Yes. If that be so, I personally believe that, okay this can be an investment avenue, which is giving me a real return, okay. So CAGR can be used for two purposes,

possibility number one, comparing the returns of an investment with Inflation, or comparing the investment returns uh, comparing the returns of one investment avenue, with another investment avenue. Now that you know about the concept of CAGR very nicely, can you tell me a specific

asset class which has given an amazing CAGR, a good return over the past few years, has to be the Stock Market, right, but the moment I use the word Stock Market there are two terms which you can quickly recall. One is the bull, and one is the bear. So, bull

basically signifies a rising market, where prices are continuously rising. It’s as good as, you buy today, uh, today morning, you sell in the afternoon. Generally, you’ll make Profit. You buy today, you sell tomorrow. You’ll generally make a

Profit. You buy today you sell after one week, one month, whatever, you will generally make a Profit, okay. That’s a classic example of a bull market, where prices are continuously rising, and most happy are retail individual investors. That’s the

frenzy in the Stock Market. Everyone wants to participate in this rally. The second one is the bear market, where it’s a danger signal. Where prices are continuously dropping and dropping and dropping. Just to give you a proper definition of a bear market, is that if the

market falls by more than 20 percent from the highest point, okay, then it will be called as a bear market. A simple mathematical example can be let’s say, highest point of the market is 100, and the Stock Market goes below 80. So, it has corrected by more than 20, then it is

an example of a bear market, okay. So, have there been bull runs in the past? Yes. Have a look at this chart. Five bull runs till now. The craziest bull run which you can see, like a sharp straight line as good as a straight line, 91, 92, and I’m sure everyone knows, Credit goes

to Mr. Harshad Mehta, right. So, that was the craziest bull run one of the longest bull runs was 2003 to 2008. Right now are we in a bull run? Answer is yes. Since corona the prices which dipped to a crazy low levels. I guess somewhere around 22nd or 23rd March. Since then nifty has been on a

continuous ride, and all the research analysts believe to some extent, little bit even I believe that right now India is in in between of a crazy bull run ahead. I believe that 2020 to 2030 should be like a golden bull run for the Indian stock

style="font-weight: bold; color: #1a73e8; text-decoration: none;">Markets, right. This was an example of a bull market. What about an example of a bear market? Immediate rise of Harshad Mehta 91,92. Crazy fall in the immediate next year. bold; color: #1a73e8; text-decoration: none;">Markets fell by more than 50 percent within a year. Okay second crazy bear market was in 2008, when nifty dropped around 6130 points to 2750 points. So that’s like a crazy fall of almost 55 percent in a single year, okay. So, I hope the moment

I talk about a bull or a bear, now it’s very much clear into your mind, what are these concepts, and what are the examples related to these concepts. And I’m sure, now many of you are fully charged up, that yes, Rachana is saying that we are in the midst of a mega bull run, plus I did a

CashNews.co just two three days ago, where in I said that can nifty cross 20000, and I’ve tried to prove you mathematically through technical analysis everything that yes there’s a great chance that nifty might cross even 20 000. So you are like fully charged up, that yes I’m going to

invest in Stock Market right away, but wait, there is one concept that you must know again, and that is the concept of Risk Tolerance. Now what is the meaning of that? Risk Tolerance refers to the amount of risk an investor can tolerate to achieve

an investment goal, okay. I should be absolutely okay even if my investment goes down. I should be able to sleep peacefully. If I’m able to do that I’m investing in something, wherein I have a Risk Tolerance towards that. So, I can say there could be two major types of

investors. One could be, one could be like an aggressive investor, one could be like a risk-averse or a conservative investor. If you’re a risk-averse or a conservative investor, Stock Market is not for you, but if you’re like a moderate risk taker or an aggressive

risk-taker, then surely you can consider parking some funds into Stock Market, but then the big question is that how will you calculate your risk-taking capability? For that, I’ve made this CashNews.co. You can also check out the i button. First you can check out this

CashNews.co. Understand what is your risk profile, and then take a decision whether you want to invest in stock Markets or not. And the final concept is asset allocation and diversification.

I’m sure everyone has heard about this quote that never put all your eggs in one basket. Similarly, never put all your Investments in a specific asset class. So, some should be allocated towards Equity, some can go in Bonds, some in mutual funds,

some in Crypto maybe, right. So, I want you all to tell me in the comment section where all have you invested your money in. Don’t put in the amounts, okay. You don’t want others

to know about how much you have, right. So let me know about where you have invested. Also, let me know if I want to make a separate CashNews.co on ideally how much should be your asset diversification? In which asset class you must invest how much percentage of your total

Portfolio? Well, I hope you have understood and enjoyed these top 10 financial concepts that one must know, and if you have, don’t forget to share it with your top 10 friends or any 10 friends. Till then, take care and bye bye.