Managing your money gets way easier when you know the basic finance terms. No matter which field you’re from, some of these words might sound super familiar… or hit you like a sudden bright light in your eyes if it’s your first time hearing them.
So why risk that glare? Chill, grab a snack, and read this blog before your eyes get dazzled. Go on, it’s all yours.
Table of Contents
EMI (Equated Monthly Instalment)
EMI stands for Equated Monthly Instalment, which is a fixed monthly payment made by a borrower to a lender to repay a loan or a large purchase. This fixed, periodic payment makes large expenses more manageable by spreading the cost over a chosen period.
Formula:
The formula for calculating EMI is
EMI = [P x R x (1+R)^N] / [(1+R)^N – 1]. In this formula, P = principal loan amount, R = monthly rate of interest and N = the total number of months for the loan tenure.
Components of EMI:
Each monthly payment is comprised of two parts:
Principal: A portion of the original amount borrowed that reduces your loan balance.
Interest: The cost charged by the lender.
Benefits of EMIs:
Affordability: EMIs make high-cost purchases like cars or homes affordable by breaking the total cost into manageable monthly payments.
Budgeting: A fixed monthly payment makes it easier to plan and manage your finances.
Convenience: It offers a convenient repayment structure, avoiding the need for a large lump-sum payment.
Financial Discipline: Paying EMIs on time helps build a good credit history, which can be beneficial for future loans.
Example in simple words:
If you take a car loan of ₹5 lakh, you pay a fixed amount every month (say ₹10,000) for 5 years to repay it along with interest.
MUTUAL FUNDS
A mutual fund is an investment vehicle that pools money from many investors to purchase a diversified portfolio of securities like stocks, bonds, and other assets. Professional fund managers oversee these funds, making investment decisions based on the fund’s objectives and managing the risk by spreading investments across different companies and sectors.
Investors buy units in the fund, and their returns are proportional to their investment, making mutual funds a convenient way to invest in a diversified portfolio without having to pick individual securities.
Types of Mutual Funds
Mutual funds can be divided into different categories based on Asset Class; equity funds, debt funds, hybrid funds, money market funds. Structure; open-ended funds, close ended funds, interval funds. Objective; growth funds, income funds, liquid funds, ELSS (tax-saving funds). Specialty; index funds, sector/thematic funds, international funds, fund of funds.
Key benefits
Diversification: By investing in a wide range of assets, mutual funds spread risk across numerous securities, reducing the impact if one investment performs poorly.
Professional Management: Investors benefit from the expertise of professional fund managers who handle the complex task of selecting and managing investments.
Accessibility: Mutual funds allow individuals to invest in a diversified portfolio with relatively small sums of money, making them accessible to new investors.
Simplicity: They offer a simple way to gain exposure to a broad market of stocks and bonds without the need to research and choose individual securities.
FIXED DEPOSITS
A Fixed Deposit (FD) is a low-risk financial product offered by banks and financial institutions where you deposit a lump-sum amount for a predetermined period (tenure) and receive a fixed interest rate on that investment.
FDs provide assured, stable returns, making them a secure option for growing savings and achieving financial goals, but they require you to keep your money locked in for the chosen tenure.
Example; You deposit ₹1 lakh for 1 year at 6% interest. At the end, you get ₹1,06,000.
CREDIT SCORE
A credit score is a three-digit number, typically ranging from 300 to 900, that summarizes your creditworthiness based on your credit history. Lenders use this score to assess the risk of lending to you and determine your ability to repay borrowed money. Your payment history, total debt, the length of your credit history, credit utilization, and credit mix all contribute to your score, with a higher score indicating a responsible borrower and increasing your chances of loan approval with better terms.
Higher score = Easier to get loans at lower interest.
CONCLUSION
Understanding basic finance terms like EMI, mutual funds, fixed deposits, or credit scores makes managing money less confusing and more effective. With this knowledge, you can make smarter financial choices, avoid unnecessary debt, and plan better for the future. Remember—financial awareness is the first step toward financial freedom.
📌Author’s Note:
This blog is not just research — it’s a step in my journey toward working with global institutions like the IMF and World Bank.
Stay tuned and grow with me
