Know the difference between saving and investing


Let us start with the basic. Do you understand the difference between saving and investing? Most of the Indians don't understand the difference between these two. And as a result they suffer a lot during their twilight years despite saving a considerable amount of money. It is very necessary to understand the difference between these two. Read this article to know.

Now let us start from the basic. Saving and investing are two terms which are often interchanged in India. Despite the availability of financial education at various levels, many Indians don't understand the difference between saving and investing. India has always been a saving-focused nation. According to a study conducted in 2016, approximately 26 percent of the household income is saved in India. No doubt, it is a considerable amount. But even then many Indians face problems during their sunset years, during the period when they stop earning. Most financial advisers opine that this is due to the fact that Indians don't understand the difference between saving and investing. So let us try to understand the difference between the two.



What is saving?

We can generally state that an adult person starts earning by the time he/she reaches 25. When he/she starts earning, he/she starts bearing personal expenditure of his/her own. In most of the cases, an earning person tries to keep the expenditure within his/her earning limit. The person tries to save some money. This is the saving of that person. For example, if a person earns Rs. 30,000/- per month and spends Rs. 25,000/- per month, then the monthly saving of that person is Rs. 5,000/-. So we can say that Saving = Income-Expenditure.

What do we do with our saving?

Now the next question is : What does a person do with his/her saving? In earlier days, people used to keep money at their residences. But nowadays, the excess money is kept at the bank from the security point of view. This amount can be withdrawn on any working day. Very recently, due to available technology, we can withdraw money as per our requirements from the ATMs. We keep our money in our savings accounts of the banks. This money earns a nominal interest. Presently, the rate of interest in saving account is 4% per annum (in most of the Indian banks).

Nowadays, with the increasing popularity of the mutual funds, some people keep the excess money, i.e., their saving in liquid funds, which give a marginally better return than the saving account. In most of the cases, an investor can withdraw money from the liquid fund within one working day.

The risk of capital loss is negligible

In case of saving account and liquid fund, the risk of loss of capital is negligible (next to nil). Although the rate of return is not substantial, the capital remains protected. Further, the required amount can be withdrawn at any time.

Let us now discuss investing

Now let us come to investment. Before we start learning about investment, let us first know what we do with the amount kept in the savings account or in the liquid fund. We use this money in emergencies and when a sudden need arises. The money, i.e., saving is used to fulfill our short-term needs. But what about our long-term goals? What do we do for having our own flat? What do we do for our children's education and marriage? And how do we keep the money for our sunset years? The answer is: We invest.

So, we must say that investment is a long-term process. We invest money in various instruments which give a better return over a longer period of time. The investment instruments are of various types. Some are almost risk-free but the liquidity is not good, i.e., there are various restrictions in the withdrawal of that money (example: money invested in the provident funds). Some investments have moderate to high risk but have much better liquidity, i.e., the amount invested in these instruments can be withdrawn at any moment (example: investment in direct stock or in mutual funds). Although these instruments don't ensure capital protection, in a longer period over 5 years, give much better return not only than the saving account or liquid fund but also than that offered by the provident funds. There are various tax benefits associated with such investment instruments. All these long-term investment instruments are used for the creation of wealth to fulfill our long-term goals.

We have to chose suitable investment instruments keeping in mind our risk-taking capabilities and the time-horizon (the time required to fulfill a particular goal).



In a nutshell

So in a nutshell, our saving is utilized to fulfill our short-term needs or in emergencies. The saving instruments are risk-free but give negligible returns. On the other hand, our investment is to fulfill our long-term goals. The investment instruments are not entirely risk-free, but in the long run, give a much better return.


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Comments

Author: Sankalan Bhattacharya26 Jul 2018 Member Level: Silver   Points : 4

The difference between the two has been wonderfully described in all its details. Indians do rely on savings and FDs in banks and post offices, which they feel much safer than investing in stocks and MFs. But this situation is gradually changing, many youngsters nowadays make a financial plan after joining in their first job and keep a tab on the stock market. There are lots of channels dedicated to money market and we have seen different apps coming out to manage the finance. This article will definitely help the beginner to start an investment plan in the right direction.

Author: Partha K.04 Aug 2018 Member Level: Diamond   Points : 6

Thanks to Mr Bhattacharya for reading this article. In this article, I have tried to make people understand the difference between saving and investing. Most of the Indians do not clearly understand the importance of investment. Many of them think that keeping the saved amount in a savings bank is an investment. Those who little bit understand the concept, are totally averse to taking reasonable risk. They keep money in recurring deposits and FDS and consequently, after some time, lament that their investment has not grown sufficiently to take care of their needs during their sunset years. They don't understand their own risk profile, time horizon to achieve their goals, retirement corpus and various other related concepts. I think, financial education is very much necessary in India and this must be started with those people who have already crossed forty.

Further, many people think that insurance is an investment. Because of this terribly wrong concept, these people go on purchasing policies after policies every year. I have been planning to write another article on this issue.

I have been trying with my very limited ability to make people aware of investing in proper investment instruments so that they can live properly during their twilight days.

Author: dipti07 Aug 2018 Member Level: Silver   Points : 3

This is such a wonderful article explaining the difference between saving and investment in simple words which even a layman can understand. For all people who earn, it is essential to first save and then invest, no matter how small you start. With the rise in inflation, it has become increasingly essential that people expand their horizons and look beyond the minimal interest from the banks. The author has lightly touched upon various types of investments and mentioned the risk and time considerations that need to be taken into account before investing.

Author: DR.N.V. Srinivasa Rao07 Aug 2018 Member Level: Diamond   Points : 5

Many of the Indians keep their money in fixed deposits so that they will get a little better than Savings account and at the same time the risk factor is less. Earlier days the small saving schemes were very popular but these days they are all outdated. Many people are trying to keep their money in mutual funds. As mentioned by the author they are all for short term requirements. The investment in real estate may be a long term investment plan only. The escalation of the principal amount will be very high in this and we can encash it at any point of time as required by us. If an employee purchases a house in the city he can stay in that and after retirement, he can sell that and go for a small house in his native place and the remaining money can be used for his living. So that may be a long term investment. I hope the author will agree with my opinion.
A nice article by the author and he brought out the difference between the two terms very nicely.



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