The Personal Finance Glossary
21 terms in plain English, with formulas, worked context and links to the guides that use them.
Absolute ReturnInvestingThe simple percentage change in an investment's value between two dates, ignoring how long the period was. It says nothing about how quickly the gain was earned.Amortization ScheduleLoansA period-by-period table of a loan's repayment showing how each EMI splits into interest and principal and what balance remains after every payment.Arbitrage FundInvestingAn equity-oriented fund that captures the price difference between a stock's cash and futures market prices, producing low-risk returns that are typically a notch above liquid funds over 12+ month horizons, with equity taxation.Compound Annual Growth Rate (CAGR)InvestingThe annualized rate at which an investment grows from a starting balance to an ending balance, assuming all returns are reinvested at the end of each year.Debt-to-Income RatioLoansThe share of your monthly income consumed by loan EMIs. Lenders typically cap total EMIs at 40–50% of income; a lower ratio means more capacity to prepay, invest, or absorb a shock.Emergency FundInvestingA dedicated pool of money kept in safe, liquid instruments to cover essential expenses during a job loss, medical emergency or urgent repair, typically 3 to 12 months of essential spending.EMI (Equated Monthly Instalment)LoansThe fixed monthly payment a borrower makes to repay a loan, split between interest and principal, where the interest share falls and the principal share rises each month on a reducing-balance loan.Expense RatioInvestingThe annual fee charged by a mutual fund scheme to manage your investments, expressed as a percentage of the fund's total assets under management (AUM).Extended Internal Rate of Return (XIRR)InvestingA financial metric that calculates the annualized rate of return for a series of irregular, date-specific cash flows (inflows and outflows).Flat Rate InterestLoansAn interest calculation where interest is charged on the full original loan amount for the entire tenure, regardless of how much principal has been repaid. It makes the effective cost far higher than the quoted rate suggests.ForeclosureLoansClosing a loan in full before its scheduled end date, either by paying the remaining principal yourself (early closure or prepayment) or, in the legal sense, when a lender seizes and sells pledged collateral after a borrower defaults.InflationInvestingThe rate at which the general level of prices for goods and services rises over time, reducing the purchasing power of each unit of currency.Liquid FundInvestingA mutual fund that invests in short-term money-market instruments such as treasury bills and commercial paper. It offers next-day withdrawal settlement and low risk, making it a common home for emergency-fund money.Loan TenureLoansThe period over which a loan is scheduled to be repaid. A longer tenure lowers the EMI but sharply increases total interest paid, because interest accrues for more years.Money-Weighted Return (MWR)InvestingA return measure that accounts for the size and timing of every cash flow an investor makes. It answers what your particular money actually earned; XIRR is its standard calculation.Net Asset Value (NAV)InvestingThe market value per share of a mutual fund scheme, calculated by dividing the total value of the scheme's assets (minus liabilities) by the number of outstanding shares/units.Opportunity CostInvestingThe value of the next-best alternative you give up when you commit money to one choice. For example, prepaying a loan at 8.5% instead of investing the same amount at an expected higher return.Prepayment PenaltyLoansA fee some lenders charge when a borrower repays a loan faster than scheduled. RBI rules prohibit prepayment penalties on floating-rate home loans; fixed-rate and some consumer loans may still carry them.Reducing Balance MethodLoansAn interest calculation where interest is charged each period on the loan's outstanding balance, so the interest component falls as the principal is repaid. Standard for home, car and most modern retail loans in India.Systematic Investment Plan (SIP)InvestingA method of investing a fixed sum of money at regular intervals (typically monthly) into mutual funds, rather than making a one-time lump-sum deposit.Time-Weighted Return (TWR)InvestingA return measure that removes the effect of cash-flow timing by linking the portfolio's growth over each holding period. It reflects the fund manager's performance and is the basis of the returns shown in mutual fund factsheets.