Simple Interest vs. Compound Interest

 INTRODUCTION

Interest is the cost of borrowing money, where the borrower pays a fee to the lender for the loan. The interest, typically expressed as a percentage, can be either simple or compounded. Simple interest is based on the principal amount of a loan or deposit. In contrast, compound interest is based on the principal amount and the interest that accumulates on it in every period. Simple interest is calculated only on the principal amount of a loan or deposit, so it is easier to determine than compound interest.

SIMPLE INTEREST

Simple interest is calculated using the following formula:

$\begin{aligned} &\text{Simple Interest} = P \times r \times n \\ &\textbf{where:} \\ &P = \text{Principal amount} \\ &r = \text{Annual interest rate} \\ &n = \text{Term of loan, in years} \\ \end{aligned}$



Generally, simple interest paid or received over a certain period is a fixed percentage of the principal amount that was borrowed or lent. For example, say a student obtains a simple-interest loan to pay one year of college tuition, which costs Rs. 18,000, and the annual interest rate on the loan is 6%. The student repays the loan over three years. The amount of simple interest paid is:

Rs. 3,240=18,000×0.06×3

and the total amount paid is:

Rs. 21240= 18000+3240

COMPOUND INTEREST

Compound interest accrues and is added to the accumulated interest of previous periods; it includes interest on interest, in other words. The formula for compound interest is:

Compound Interest=P×(1+r)t−P

Where:

P= Principal Amount

R= Annual Interest Rate

t= Number of years interest is paid

It is calculated by multiplying the principal amount by one plus the annual interest rate raised to the number of compound periods, and then minus the reduction in the principal for that year. With compound interest, borrowers must pay interest on the interest as well as the principal.

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Debit Card vs Credit Card

 INTRODUCTION

Many debit cards and credit cards have similar features. Typically, both cards carry the logo of a major credit card company, such as Visa or MasterCard, and both can be swiped at retailers to purchase goods and services.

However, the key difference between the two cards is where the money is drawn from when a purchase is made. When a consumer uses a debit card, the money comes directly from his or her checking account. When he or she uses a credit card, the purchase is charged to a line of credit for which he or she is billed at a later date.

A debit card may come with an overdraft line of credit connected to a customer's checking account to cover overspending. A credit card has a specified amount of credit connected to it, and if a consumer tries to spend beyond the credit limit, the card will be denied.

DEBIT CARD

A debit card might look like a credit card but it is distinctly different than one. A debit card is issued by a bank to their customers for the purpose of accessing funds without having to write a paper check or make a cash withdrawal.

A debit card is linked to one's checking account and can be used anywhere credit cards are permitted. If your debit card has a Visa logo, for example, it can be used anywhere that takes Visa.

When you use a debit card, the bank places a hold in the amount you have spent. Depending on the purchase amount and your bank, the money will either go immediately out of your account or be held by the bank for 24 hours or longer.

You can use your debit card to withdraw cash from your checking account by using a unique personal identification number (PIN). When you use your debit card for a purchase, you may be asked for your PIN or you may simply be asked to sign for the purchase, similar to a credit card.

CREDIT CARD

A credit card is a debt instrument to be used for financial transactions in lieu of cash or check, or a debit card. Depending on its owner's credit-worthiness, a credit card may have come with a high spending limit or a lower one. When you use a credit card, the purchase amount is automatically added to your outstanding balance.

With most credit card companies, a customer has 30 days to pay before interest is charged on the outstanding balance, though in some cases, interest starts accruing right away.

Interest rates on credit cards can be notoriously high; they are a chief way credit card companies make money. Savvy consumers can avoid paying it by settling their balance in full each month.

CONCLUSION

By definition, all credit cards are debt instruments. Whenever someone uses a credit card for a transaction, the cardholder is essentially just borrowing money from a company, because the credit card user is still obligated to repay the credit card company.

Debit cards, on the other hand, are not debt instruments because whenever someone uses a debit card to make a payment, that person is really just tapping into his or her bank account. With the exception of any related transaction costs, the debit user does not owe money to any external party; the purchase was made his or her own available funds.

However, the distinction between debt and non-debt instruments becomes blurred if a debit card user decides to implement overdraft protection. In this case, whenever a person withdraws more money than is available in his or her account, the bank pays the outstanding amount. The bank account-holder is then obligated to repay the account balance owed and any interest charges that apply to using the overdraft protection.

Overdraft protection is designed to prevent embarrassing situations, such as bounced checks or declined debit transactions. However, this protection does not come cheaply; the interest rates charged by banks for using overdraft protection are as high, if not higher, than the ones associated with credit cards. Therefore, using a debit card with overdraft protection can result in debt-like consequences.

Electronic Payment Industry: MasterCard vs Visa

INTRODUCTION

The electronic payments industry is dominated by four companies - Visa, MasterCard, American Express, and Discover are responsible for handling the majority of the world’s card payments. Visa and MasterCard present unique offerings since neither company is involved with extending credit or issuing any cards. This means that all Visa and MasterCard payment cards are issued through some type of co-branded relationship. While the two companies don’t extend or issue any cards, they do partner to offer the broadest array of products encompassing credit, debit, and prepaid card options.

Most People today have at least one debit and credit card. Many people have a number of them, seeking to take advantage of all the rewards, cash-back opportunities, and promotional benefits that issuers have to offer.

BUSINESS MODEL OF VISA AND MASTERCARD

Credit cards often dominate the headlines, with approximately $1 trillion in outstanding revolving credit balances as of Q4 2019. Consumers are easily familiar with debit cards, which along with credit cards and other forms of non-cash payments generate around $174.2 billion in transaction volume representing $97.04 trillion in value annually. As the financial technology market evolves, more and more prepaid card offerings are also being brought to market, generating around $200 billion in annual volume.

Visa and MasterCard are the only network payment processors that are involved in all three areas of the payments market. Working exclusively as network processors, these two companies have a unique edge but operate differently.

Visa and MasterCard are both publicly traded. Visa (trading symbol V) commands a $365 billion market capitalization while MasterCard (trading symbol MA) follows closely behind at $293 billion. Since neither company extends credit or issues cards through a banking division, both have a broad portfolio of co-branded offerings.

The business models of both companies are very similar. Visa and MasterCard do not issue cards directly to the public but rather through partner member financial institutions like banks and credit unions. The member financial institution then issue cards payment cards for individuals and businesses, either directly or in partnership with airline, hotel or retail brands.

VISA

In 2019, Visa generated $23 billion in total revenue with payments volume of $8.8 trillion. Visa’s core products include: credit, debit, and prepaid cards as well as business solutions and global ATM services. The company’s reportable business segments include the following:

• Service
• Data Processing
• International Transactions
• Other

Both Visa and MasterCard earn the majority of their revenue from service and data processing fees but the two companies characterize these fees differently and also have their own fee structures. Service fees are charged to the issuer and are based on card volume.

Data processing fees are generally also charged to the issuer who in turn retrieves these fees by charging merchants for each individual transaction. Data processing fees are typically very small, fixed fees, charged on a per-transaction basis that cover the costs of providing transnational information communicated on the network.

In general, Visa is known for offering three card levels: base, signature, and infinite. These categories come with standardized provisions for issuers.

MasterCard

In 2019, MasterCard generated total revenue of $16.9 billion, with a payment volume of $6.5 trillion.

 MasterCard’s core products include consumer credit, consumer debit, prepaid cards, and a commercial product business. MasterCard has one reportable business segment known as Payment Solutions which is broken out by geographies across U.S. and other.

Like Visa, MasterCard earns the majority of its revenue from service and data processing fees. However, it characterizes the fees differently. Service fees for MasterCard are negotiated and calculated as a percentage of global dollar volume. Data processing fees are known as switching fees. Switching fees are a small, fixed cost per transaction, charged to the issuer.

MasterCard is known for offering three card levels: base, world, and world elite.

Top Investment Strategies

 

1. VALUE INVESTING

Value investors are bargain shoppers. They seek stocks they believe are undervalued. They look for stocks with prices they believe don’t fully reflect the intrinsic value of the security. Value investing is predicated, in part, on the idea that some degree of irrationality exists in the market. This irrationality, in theory, presents opportunities to get a stock at a discounted price and make money from it.

It’s not necessary for value investors to comb through volumes of financial data to find deals. Thousands of value mutual funds give investors the chance to own a basket of stocks thought to be undervalued. The Russell 1000 Value Index, for example, is a popular benchmark for value investors and several mutual funds mimic this index.

2. GROWTH INVESTING

Rather than look for low-cost deals, growth investors want investments that offer strong upside potential when it comes to the future earnings of stocks. It could be said that a growth investor is often looking for the “next big thing.” Growth investing, however, is not a reckless embrace of speculative investing. Rather, it involves evaluating a stock’s current health as well as its potential to grow.

A growth investor considers the prospects of the industry in which the stock thrives. You may ask, for example, if there’s a future for electric vehicles before investing in Tesla. Or, you may wonder if A.I. will become a fixture of everyday living before investing in a technology company. There must be evidence of a widespread and robust appetite for the company's services or products if it’s going to grow. Investors can answer this question by looking at a company's recent history. Simply put: A growth stock should be growing. The company should have a consistent trend of strong earnings and revenue signifying a capacity to deliver on growth expectations.

A drawback to growth investing is a lack of dividends. If a company is in growth mode, it often needs capital to sustain its expansion. This doesn’t leave much (or any) cash left for dividend payments. Moreover, with faster earnings growth comes higher valuations which are, for most investors, a higher risk proposition.

3. MOMENTUM INVESTING

Momentum investors ride the wave. They believe winners keep winning and losers keep losing. They look to buy stocks experiencing an uptrend. Because they believe losers continue to drop, they may choose to short-sell those securities. But short-selling is an exceedingly risky practice. More on that later.

Think of momentum investors as technical analysts. This means they use a strictly data-driven approach to trading and look for patterns in stock prices to guide their purchasing decisions. In essence, momentum investors act in defiance of the efficient-market hypothesis (EMH). This hypothesis states that asset prices fully reflect all information available to the public. It’s difficult to believe this statement and be a momentum investor given that the strategy seeks to capitalize on undervalued and overvalued equities.

Best Investment Options in India

Stocks

As equity investments that represent a share of ownership in a company or entity, stocks are one of the best investment avenues for long-term investors. These can be traded in a marketplace called the ‘Stock Market’, where all trades are done electronically.

Fixed Deposit

For investors looking for lucrative returns with lowest risk, Fixed Deposit (or FD) is one of the best investment avenues. By investing in a Fixed Deposit, you can get assured returns at fixed intervals of time. This investment avenue is one of the most preferred options in India, due to the convenience and flexibility it offers. Even investors with high risk appetite choose to invest in FD to diversify their investments and stabilize their portfolio.

Mutual Funds

These are collective investment vehicles managed by a fund manager which pools people’s money and invests in stocks and bonds of various companies and create a return. With the convenience of low initial investments, mutual funds are volatile investment avenues, that are best suited for medium-risk investors.

Senior Citizen Savings Scheme

 As a government-sponsored scheme for individuals above 60 years of age, Senior Citizen Savings Scheme is a great long-term saving option for retirees. It is a great option to get steady and secure income, and senior citizens can get a high and steady rate of interest, as prescribed by the government from time to time.

Public Provident Fund

 Public Provident Fund is one of the most common and trusted investment plans in India. It pays interest rate annually and requires a minimum investment amount of Rs 500 per annum. It has a life of 15 years with partial withdrawals allowed of the corpus at various points. This option also pays a high and steady rate of interest as prescribed the government from time to time.

3. Debt mutual funds
Debt mutual fund schemes are suitable for investors who want steady returns. They are less volatile and, hence, considered less risky compared to equity funds. Debt mutual funds primarily invest in fixed-interest generating securities like corporate bonds, government securities, treasury bills, commercial paper and other money market instruments.

However, these mutual funds are not risk free. They carry risks such as interest rate risk and credit ..

Read more at:
https://economictimes.indiatimes.com/wealth/invest/top-10-investment-options/articleshow/64066079.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

3. Debt mutual funds
Debt mutual fund schemes are suitable for investors who want steady returns. They are less volatile and, hence, considered less risky compared to equity funds. Debt mutual funds primarily invest in fixed-interest generating securities like corporate bonds, government securities, treasury bills, commercial paper and other money market instruments.

However, these mutual funds are not risk free. They carry risks such as interest rate risk and credit ..

Read more at:
https://economictimes.indiatimes.com/wealth/invest/top-10-investment-options/articleshow/64066079.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

3. Debt mutual funds
Debt mutual fund schemes are suitable for investors who want steady returns. They are less volatile and, hence, considered less risky compared to equity funds. Debt mutual funds primarily invest in fixed-interest generating securities like corporate bonds, government securities, treasury bills, commercial paper and other money market instruments.

However, these mutual funds are not risk free. They carry risks such as interest rate risk and credit ..

Read more at:
https://economictimes.indiatimes.com/wealth/invest/top-10-investment-options/articleshow/64066079.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

3. Debt mutual funds
Debt mutual fund schemes are suitable for investors who want steady returns. They are less volatile and, hence, considered less risky compared to equity funds. Debt mutual funds primarily invest in fixed-interest generating securities like corporate bonds, government securities, treasury bills, commercial paper and other money market instruments.

However, these mutual funds are not risk free. They carry risks such as interest rate risk and credit ..

Read more at:
https://economictimes.indiatimes.com/wealth/invest/top-10-investment-options/articleshow/64066079.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

3. Debt mutual funds
Debt mutual fund schemes are suitable for investors who want steady returns. They are less volatile and, hence, considered less risky compared to equity funds. Debt mutual funds primarily invest in fixed-interest generating securities like corporate bonds, government securities, treasury bills, commercial paper and other money market instruments.

However, these mutual funds are not risk free. They carry risks such as interest rate risk and credit ..

Read more at:
https://economictimes.indiatimes.com/wealth/invest/top-10-investment-options/articleshow/64066079.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

3. Debt mutual funds
Debt mutual fund schemes are suitable for investors who want steady returns. They are less volatile and, hence, considered less risky compared to equity funds. Debt mutual funds primarily invest in fixed-interest generating securities like corporate bonds, government securities, treasury bills, commercial paper and other money market instruments.

However, these mutual funds are not risk free. They carry risks such as interest rate risk and credit ..

Read more at:
https://economictimes.indiatimes.com/wealth/invest/top-10-investment-options/articleshow/64066079.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

3. Debt mutual funds
Debt mutual fund schemes are suitable for investors who want steady returns. They are less volatile and, hence, considered less risky compared to equity funds. Debt mutual funds primarily invest in fixed-interest generating securities like corporate bonds, government securities, treasury bills, commercial paper and other money market instruments.

However, these mutual funds are not risk free. They carry risks such as interest rate risk and credit ..

Read more at:
https://economictimes.indiatimes.com/wealth/invest/top-10-investment-options/articleshow/64066079.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

3. Debt mutual funds
Debt mutual fund schemes are suitable for investors who want steady returns. They are less volatile and, hence, considered less risky compared to equity funds. Debt mutual funds primarily invest in fixed-interest generating securities like corporate bonds, government securities, treasury bills, commercial paper and other money market instruments.

However, these mutual funds are not risk free. They carry risks such as interest rate risk and credit ..

Read more at:
https://economictimes.indiatimes.com/wealth/invest/top-10-investment-options/articleshow/64066079.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst34eij4wekgjeoygij5gpe