Savings vs investing: Understand the key differences
Since ancient times, families have believed in parking their hard-earned money in a relatively stable place with easy access to funds whenever needed. This tradition has been passed on from generation to generation till today. However, the changing world offers newer avenues to make the most of your wealth and grow it for the future.
This article draws comparisons between the age-old practice of savings and relatively new-age investing.
- Table of contents
Concept of savings
‘Savings’ is a term that resonates with every Indian household. It's the practice of setting aside a portion of your income, often in a bank account, for future use or unforeseen emergencies. Traditionally, savings have been considered the foundation of financial stability for the middle class. They seek to offer a financial cushion to fall back on when life throws unexpected curveballs.
The most common forms of savings are:
Bank savings accounts: These are stable, easily accessible and provide liquidity, although with relatively lower interest rates.
Fixed deposits (FDs): A preferred among conservative savers; FDs offer higher interest rates but lock your money in for a predetermined period.
Recurring deposits (RDs): Similar to FDs, RDs allow you to save a fixed amount regularly, making them suitable for disciplined savers.
Savings bonds: These government-backed instruments are low-risk and generally offer relatively reasonable returns than standard savings accounts.
Concept of investments
Investing, on the other hand, is the art of deploying your money in assets or financial instruments with the expectation of generating income or increasing its value over time. Investments are like the seeds you sow, hoping to reap their benefits in the future.
Common investment avenues include:
Stock market: Buying shares of companies with the potential for capital appreciation over time.
Mutual funds: Pooled funds managed by professionals, investing in stocks, bonds, or other securities.
Real estate: Acquiring property or real estate assets that can appreciate or generate rental income.
Bonds: Fixed-income securities issued by governments or corporations that pay interest and return the principal at maturity.
Gold and precious metals: Investing in physical assets or through commodity exchanges as a hedge against inflation and economic uncertainties.
Difference between savings and investment
Purpose
Savings: The primary purpose of savings is to preserve capital and provide a cushion against unforeseen expenses. Savings are usually held in relatively low-risk accounts, readily accessible when needed.
Investments: Investments are made with the intention of achieving financial goals beyond mere wealth preservation. Whether it's wealth accumulation, income generation, or long-term growth, investments aim to potentially increase your initial capital over time.
Risk and return
Savings: Savings instruments are generally low risk, but they offer correspondingly lower returns. The focus here is on the stability of your funds rather than the return potential.
Investments: Investments come with varying degrees of risk – from relatively low-risk options like bonds to higher-risk options like stocks. However, they also offer the potential for returns over the long term.
Liquidity
Savings: Savings accounts and instruments offer high liquidity. You can withdraw your money at any time, making it suitable for emergencies and short-term goals.
Investments: Many investments have lower liquidity compared to savings. For instance, selling real estate or certain types of stocks may take time, and early withdrawals from investments like fixed deposits may incur penalties.
Time Horizon
Savings: Savings are often associated with short- to medium-term goals. They cater to immediate needs and unexpected expenses, such as medical emergencies or home repairs.
Investments: Investments typically have a longer time horizon. They are aligned with long-term financial objectives like retirement planning, wealth creation, and funding major life events.
Inflation protection
Savings: While savings provide protection of capital, they may not always keep pace with inflation. Over time, the purchasing power of your savings can significantly erode due to rising prices.
Investments: Certain investments, such as stocks, real estate, and commodities, have the potential to outpace inflation over the long term.
Growth potential
Savings: Savings instruments have limited growth potential. The interest rates on savings accounts and fixed deposits may not provide substantial wealth accumulation opportunities.
Investments: Investments offer the potential for capital appreciation and wealth accumulation. Over time, compounding may lead to potentially exponential growth.
Conclusion
Savings act as your financial cushion, providing the steadiness and liquidity needed to weather unexpected storms. However, savings alone may not be sufficient to achieve your long-term financial goals. Investing, on the other hand, allows your money to work for you. It has the potential to grow your wealth, beat inflation over the long term, and provide a source of passive income. By carefully diversifying your investments, you can manage risk and aim for reasonable returns.
So, whether you're setting aside money for your child's education, building your dream home, or preparing for retirement – remember that the key lies in finding the right balance between saving for today and investing for tomorrow.
FAQs:
What is the key distinction between saving and investing?
Savings involve putting money aside in low-risk accounts, while investing means using funds to purchase assets for potential growth or returns.
How can I decide whether to save or invest my money?
Consider your financial goals and risk tolerance. Saving is for short-term needs, while investing is for long-term wealth growth.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as 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.