Exploring the key differences between investing and savings

Exploring the key
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In India, like in many other parts of the world, investing and savings are often used interchangeably. However, there is a clear distinction between the two concepts. This article aims to explore differences between investment and savings, and how each approach has its own merits and applications based on your financial situation and objectives.

  • Table of contents
  1. What is saving?
  2. Some key characteristics of saving
  3. What is investing?
  4. Some key characteristics of investing
  5. When to invest vs save?
  6. FAQ

What is Saving?

Saving refers to setting aside a portion of your earned income in a bank account, provident fund, or other saving instruments with the aim of accumulating a pool of funds over time that can be used for future needs or emergencies. The primary goal of saving is protection of the invested capital.

Some key characteristics of saving

  • Capital is stored in relatively stable instruments like savings accounts, with minimal risk of loss of principal.
  • Returns are usually fixed and pre-determined based on interest rate offered by the bank/institution. Returns may sometimes fail to beat inflation over long periods.
  • Easy access to funds with flexibility to withdraw money as needed for short term goals.
  • Not ideally suited for long-term wealth creation goals like retirement due to inflation risk over many years.

Thus, savings may be better suited for short to medium term financial goals within 5-10 years where capital preservation is important.

What is Investing?

Investing refers to allocating funds into instruments that have the potential to generate wealth over the long term like stocks, mutual fund investments, real estate, etc. The primary goal of investing is to earn relatively better returns than simple savings instruments. Investing can prove to be a good way to put your money to work and build wealth in the long run. It can also help you generate inflation-beating returns. The greater growth potential of investing is due to the power of compounding and the risk-return tradeoff.

Some key characteristics of investing

  • Due to fluctuations in share markets or property prices, higher risk is involved as compared to savings.
  • Returns are not fixed or guaranteed but have potential for better growth than savings over long periods.
  • Not as liquid as savings. May take time to liquidate investments if there’s a need to access funds before maturity.
  • Ideally suited for long term objectives like retirement, child's education etc., where one can ride out short term volatility.

Thus, investing helps combat inflation and can achieve long term objectives, unlike saving, which only provides inflation adjusted returns at best.

When to Invest vs Save?

It is generally better to save for goals that may take 1-3 years to achieve. This includes short-term goals like planning an annual vacation. On the other hand, goals that are 3 years or longer away are suited for investing. Investing provides a relatively better return potential over time to beat inflation when the time horizon is 3 years or longer.

Conclusion

While saving and investing both aim to achieve financial goals, their approach differs significantly given their distinct risk-return tradeoffs. Understanding investment vs saving differences is critical to formulate the right savings and investment strategy tailored to your unique needs and time horizon for various life goals. A combination of both is usually required across different asset classes and time periods. With discipline and diligence, you can make the most of both for a better financial future.

FAQs:

Is it better to save or invest a lumpsum amount?
If the amount is large and the goal is more than 3-5 years away, it may be better to invest it for a relatively higher return potential through systematic investment in mutual funds. Else, savings is better to park lumpsums within 3 years where stability of capital is priority.

How can I get the benefits of both saving and investing?
Maintain separate accounts – one for short term savings goals and another for long term SIPs in mutual funds or other investments. Try growing your investment corpus steadily while protecting savings for cashflow needs.

What is the difference between fixed and recurring deposits?
Fixed deposits have a fixed tenure while recurring deposits accept periodic installments over a period. Both offer almost similar rates, good for parking short term money. However, FDs have no step-up in interest rates for longer tenures unlike RDs where interest rates increase for longer installment periods.

Mutual Fund investments are subject to market risks; read all scheme-related documents carefully.
This document should not be treated as an endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.