Are you(financially) literate?

I know, you(anyone reading this blog) is not only literate but educated(or may be highly educated) as well. How ever very few of us are financially literate, we hardly understand the basics of finance or money market instruments for which we become the easy target of financial product mis-selling. It's not just one off a case, I have so many friends and relatives who have been sold rather I would say I have hardly found anyone who has not been a victim.

Do you want to check whether you are financially literate or not, answer below questions( even though it looks like a subjective matter, I have tried my best to make it as objective as possible). All the answers are Yes/No type and you can consider yourself literate only If you can answer all of them correctly.

1. Do you know the difference between saving and investing?

2. Do you understand how equity mutual fund works?

3. Do you believe your money is safe in fixed deposit?

4. Do you consider investing in stock market is risky?

5. Do you think real estate is the best investment?

6. Do you know what is a term insurance?

7. Do you consider insurance as an investment?

8. Do you believe in instant stock tips received through SMS(from unknown numbers) or business news channels?

9. Do you understand the difference between simple interest and compound interest?

10. Do you know how much interest your savings bank account is giving?

The above questions are my own and as per my own assessment of people's knowledge or perception. Below are the answers(Yes/No) but with little more explanation to help you understand why these are so crucial for your financial literacy. You can consider your self literate only If you are correct for all 10 questions( and your answers are aligned with the explanation). AS I told I am trying to make it as objective as possible so result would be either you are literate(know all the answers correctly) or illiterate( you are not correct for any one or more questions), but there is no in between or you are 60% or 90% literate.

Answers:

1. Yes ( Savings to preserve the capital i.e. fixed deposit but investing means appreciating with time beating inflation i.e. equity or sometimes real estate or gold)

2. Yes ( Money from all investors or unit holders are pulled together and managed, i.e. invested in equity market, by experts called fund manager)

3. No ( After tax return is less than current rate of inflation, i.e. the money you are left with after a year in an FD won't have the same buying power of today)

4. No (Its risky If you invest without knowledge or just speculate, else in long term,more than 5 years, historically it has given the best return among all asset classes)

5. No (It may beat the inflation in long term, in some special situation in short term you may make good return but its not sustainable)

6. Yes ( Pure insurance, very low premium and with very high assured value, no investment component - No return If the insurer is alive after the term but very high value in case of demise)

7. No ( A large portion of the premium goes for mortality, administration, commission etc. absolute return will be less than or equal to FD)

8. No ( None gives free advice, there are vested interests behind those tips)

9. Yes ( Simple interest is just interest on the capital every year, in compound interest the interest earned is added to the capital and interest is calculated on the total capital periodically)

10. Yes (Typically 3-4% PA with a couple of banks offering 5-7% PA)

Next time you buy an insurance or any such investment product do some research, understand the features and your requirements then buy. Verify each word of the agent keeping in mind that he is going to get very good commission out of your investment. 

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