Top 10 Financial Concepts You Must Know | CA Rachana Ranade - YouTube

Hey folks, CA Rachana Ranade here, and I welcome  you all to a very important video, 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  

video 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 video and if you want to know more  

about health insurance this is the video 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 video?

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 video 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  

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. 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 video  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 video. You can also  

check out the i button. First you can check out  this video. 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 video 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.