Part 38 of 43 in How to Invest Your Money: Lessons from the World’s Greatest Investors, Adapted for the Indian Investor← Part 37Part 39 →
This glossary explains common investing terms used to understand portfolios, businesses, risk, and investor behavior. It helps Indian investors interpret ideas such as asset allocation, compounding, index funds, SIPs, and permanent loss of capital.
- Asset allocation divides a portfolio among equities, fixed income, gold, and cash, shaping long-term risk and return.
- Compounding allows returns to generate further returns, while interruptions can reduce investment results.
- An economic moat is a durable advantage that helps a business earn high returns on capital over time.
- Rebalancing restores target portfolio weights, while SIPs invest fixed amounts regularly and reduce timing risk.
- Temperament, including patience and discipline, helps investors follow a sound process through changing market conditions.
Asset Allocation: The division of a portfolio among major asset classes such as equities, fixed income, gold, and cash. It is the primary determinant of long-term risk and return for most investors.
Circle of Competence: The set of businesses or industries an investor understands well enough to make informed judgments. Staying inside it reduces errors.
Compounding: The process by which returns generate further returns over time. Interrupted compounding is one of the most common ways investors reduce their results.
Drawdown: The peak-to-trough decline in portfolio value. Understanding that significant drawdowns are normal helps maintain perspective.
Economic Moat: A durable competitive advantage that allows a business to earn high returns on capital for an extended period.
Expected Value: The probability-weighted average of possible outcomes. Thinking in expected value rather than single-point forecasts improves decision quality.
Index Fund: A fund designed to replicate the performance of a market index such as the Nifty 50, typically at very low cost.
Permanent Loss of Capital: A decline that is not recovered because the underlying business is impaired, leverage forces sale, or the investor sells and does not re-enter. Avoiding this is a central objective.
Rebalancing: Periodically adjusting portfolio weights back to target allocations. It enforces discipline and can improve risk-adjusted results.
SIP (Systematic Investment Plan): A method of investing fixed amounts at regular intervals, widely available in Indian mutual funds. It automates discipline and reduces timing risk.
Temperament: The emotional and psychological qualities—patience, discipline, emotional control—that allow an investor to follow a sound process through varying market conditions. Often more important than analytical intelligence.
Frequently asked questions
What is asset allocation?
Asset allocation is the division of a portfolio among major asset classes such as equities, fixed income, gold, and cash. It is the primary determinant of long-term risk and return for most investors.
What is permanent loss of capital?
Permanent loss of capital is a decline that is not recovered because the underlying business is impaired, leverage forces a sale, or the investor sells and does not re-enter.
What is an SIP in investing?
A Systematic Investment Plan, or SIP, invests fixed amounts at regular intervals. It is widely available in Indian mutual funds, automates discipline, and reduces timing risk.
Why is temperament important for investors?
Temperament includes patience, discipline, and emotional control. These qualities help investors follow a sound process through varying market conditions and are often more important than analytical intelligence.