Common personal finance terms II

Mutual Fund – a professionally managed investment that pools money from different investors and then invests the money according to the investment objectives of the fund. This is a good way for beginners to take advantage of the investment know-how of professional investment managers. A mutual fund provides widely spread diversification that individuals cannot achieve with their small amounts of investments.

Real estate investment trust – A mutual fund that specialises solely in real estate assets. It usually owns and/ or manages a pool of commercial properties, mortgages and other real estate assets.

South West governors meet in Ibadan, pledge to tackle security challenges

Retirement savings account – A major tool in retirement planning, it is a savings account opened with a Pension Fund Administrator into which monthly contributions are made both by the account owner and her employer. Access to this account is restricted to after retirement, at which time monthly disbursements are made to the account owner. Bulk payments can be arranged but these are limited in line with the guiding laws to the peculiarities of each individual. A number of people are now moving all their RSA balances to insurance annuities, this is because of the added life insurance benefit that insurance products offer.

Insurance annuity – This is a savings investment with an Insurance company that promises to pay a certain amount to the insured or specified beneficiaries in bulk or over a period of time. The benefit of insurance products is that they commit to paying the amount negotiated whether or not the insured lives long enough to fulfill her own savings obligations.

Life insurance – This is a legal contract with an insurance company to pay to pre-designated beneficiaries a pre-agreed sum on the death of the insured. It usually requires that the insured contribute a fixed amount for a period of time but should the insured die before completing contributions, the Insurer is obligated to pay full value.

Estate planning – The process of efficient distribution of an individual’s property in line with that individual’s priorities and objectives. This gives the deceased control over his assets even in death.

Return on investment (RPI) – is the amount of income one makes from an investment. It is an efficiency index; usually measured in percentage so that different classes of investments can be compared for how well they reward the investor. Comparison is also made even within the same asset class e.g. property in Port Harcourt compared with one in Ibadan or shares of oil companies compared with those of banks.

Passive Income – This is income earned from business in which the investor is not actively involved in the day-to-day workings. The investor does the work once but continues to earn the income for a long time. Examples include rent, dividends, royalties, interest on deposits etc. Most investment income are passive income.

Time value of money – This is the concept that states that one thousand Naira today has more value than one thousand Naira next year simply because of the passage of time. Since the money could have been invested in trading during the year and earned some income for the owner. Besides, inflation would have eroded the purchasing power of the money. That is why up front interest has a higher value than back end interest, even if the interest rates are numerically the same value.

Time horizon – It is the period of time during which a specific goal must be achieved. Or the period one expects to invest in an asset before having to dip into the principal invested. The time line to maturity of life’s various needs and events would determine whether investment assets are Short, Medium or Long Term.

Risk appetite – Every step we take in life has a risk. Each asset class also has its own risks, but some are riskier than others. Generally, money market investments are less risky than equities because there is little chance that one could lose her money in a fixed deposit or treasury bill. However, in the equity market, prices fluctuate. The share price could fall below one’s purchase price causing a loss of the principal amount invested. However, for good companies the price drop is only temporary and would be expected to swing back up. Equity investments rise in the long term and beginners should avoid short term investments based on speculations of price movements.

Due diligence – a comprehensive appraisal of an investment or investment manager to ensure that they have the ability and willingness to deliver on the income or service promises made. It is vital to carry out due diligence before one parts with a kobo.

(Concluded).