Principal amount
Principal amount has different meanings in different perspectives. In investment parlance, it means the actual amount that one has invested or the face value of your securities.
Principal amount is also used to quantify the amount that one has borrowed. The interest is charged on the principal amount that is outstanding.
In view of the above two definitions, consider the following examples:
- Suppose, Arjun has invested Rs.100/- in a mutual fund. Today, the value of that fund is 115/-. It means that he has earned Rs. 15/- on the principal of Rs.100, or he has earned 15% yield on his investment.
- Consider Raj has opted for a fixed deposit of 100/- for 1 year for 8%. It means if the interest Is computed annually, he will earn Rs.8/- on his principal amount of Rs.100/-. after a year
- Kiran has opted for a Home Loan of Rs.20 lacs. Till he repays a part of the principal he has borrowed, he will be paying interest on the principal amount, i.e. Rs.20 lacs, that he has borrowed.
It is important to know that people, in general are more concerned with preserving the principal amount of their investment and then they go for risk based on their appetite to appreciate the value of their investment.
The principal amount is said to be the initial amount an investor used to Invest. He receives interest or profit on this amount. From the article itself Is clear that when an investor invests the money in any financial Instrument, he tries to keep the principal amount risk free. Earning profit With minimum risk is the main motive.
Short, crisp and to the point article. Principal is a very common term used but its meaning is at times misinterpreted. But the article with various examples cited made it very clear the diferent use of the word in context to finance.