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In order to make informed choices in the investment and savings landscape in India, one needs to understand their requirements and the differences between saving and investing.
The act of saving and the act of investing can often be conflated into one composite method of wealth accumulation; but one must remember the various tax liabilities, incurred costs, market-risks and liquidity issues that might hamper either of the avenues for a prospective investor. Therefore, let us read further to understand the differences between saving and investing.
Saving vs. Investing: Explained
The basic goal that an investor or earning individual has when they wish to grow their personal corpus is the financial visibility or security they may find from choosing to do either of the things. The fundamental differences between savings and investing is the investment horizon a person may have at the time of need.
Savings
As one can gauge from the word itself, the act of taking a sum of money and consciously setting it aside for future purposes or as an emergency fund is called saving. One can keep adding to this corpus, where monthly they may save a chunk of their earnings and set it aside for an impending expense they might have visibility for. It can be for personal goals or short term expenses such as travel, property maintenance, or even unforeseen emergencies etc.
Savings can be set in savings accounts or fixed deposit accounts in banks among a host of other options available as well.
Investing
Investing is the act of consciously putting funds in money-market, or investment instruments in order to aid capital growth on the basis of compounding interest rates, direct stock equity profits, mutual funds, or bonds or real estate etc. The risk factor of investing in market-linked investment plans India is ever-present, where the highest returns are coupled with the possibility of highest losses incurred at the time of a fluctuating or volatile market.
Investments can be done in various ways through investment plans such interest-rate government schemes, stock market trading, mutual funds bonds, gold and real estate.
When we are considering the differences between saving and investing, the risk associated with the latter is one of the most crucial factors that sets them apart for most people.
Key Difference between Saving and Investment
Since the terms saving and Investment are often used interchangeably, it is essential to illuminate the differences between saving and investing so that a person can choose to find a plan that caters to their financial goals and necessities in the long run. Savings vs investment can be broken down into the following requisites:
Criterion |
Saving |
Investment |
Associated Risk |
Low, since it is usually done with financial tools from banks and post offices |
High, depending on the type of investment |
Liquidity |
High |
High, however the investment and encashed amount may vary |
Inflation Protection |
Cash value may be affected |
Can bear inflation-related fluctuations |
Expected Returns |
Relatively low due to capped interest rates |
Potentially higher or lower |
Typical Products |
Savings accounts, fixed deposits |
Stocks, bonds, mutual funds |
Criterion |
Saving |
Investment |
Associated Risk |
Low, since it is usually done with financial tools from banks and post offices |
High, depending on the type of investment |
Liquidity |
High |
High, however the investment and encashed amount may vary |
Inflation Protection |
Cash value may be affected |
Can bear inflation-related fluctuations |
Expected Returns |
Relatively low due to capped interest rates |
Potentially higher or lower |
Typical Products |
Savings accounts, fixed deposits |
Stocks, bonds, mutual funds |
Savings vs Investment: Which is More Important for you?
A potential investor or someone looking to save their funds for later will always benefit from a robust financial road-map at the beginning.. Since there are multiple differences between saving and investment, one should do thorough research when looking for the option that serves their purposes better.
India has a very dynamic income and investment market, one that is built to cater to customizable needs and financial obligations. Hence, while determining the differences between saving and investment, one has to consider which one is more important and beneficial to their immediate financial goals. The matrix of pros and cons for each can only be validated when the person making the choice is well-prepared to understand the requisites that come with both.
If you are someone who has low risk tolerance, values stability over exponential fund growth, and needs short-term monetary solutions and support; a savings option should be more important to you. If you are expecting a large expense on a shorter horizon, you can start preparing with a savings or fixed deposit account which have also been made more flexible nowadays.
India has a very dynamic income and investment market, one that is built to cater to customizable needs and financial obligations. Hence, while determining the differences between saving and investment, one has to consider which one is more important and beneficial to their immediate financial goals. The matrix of pros and cons for each can only be validated when the person making the choice is well-prepared to understand the requisites that come with both.
If you are someone who has low risk tolerance, values stability over exponential fund growth, and needs short-term monetary solutions and support; a savings option should be more important to you. If you are expecting a large expense on a shorter horizon, you can start preparing with a savings or fixed deposit account which have also been made more flexible nowadays.
If you are someone who is well-versed with market-linked instruments, mutual fund behaviour and wish to build a personal capital that sustains you throughout your financial obligations even in the far future; investment options may be a better fit for you. Investments thrive on risk, wealth growth and movement, and can offer exponentially large returns over an extended period of time.
How Much Should I Save and Invest?
As discussed before, the act of saving and investing is largely dependent on the financial outlook and prospects of the investor. It is an important decision to make as it can ease financial and emotional distress in unfortunate circumstances.
Savings and Investments are valuable assets that a person can use to their liking. There is no fixed metric to determine the ideal ratio between savings and Investments, but it is driven mostly by the investment horizon and foreseeable expenses a person may have.
For younger individuals who have lesser liabilities and dependents on them, a 20% savings on the income earned is usually a good place to start. Gradually when liabilities like taxes, loan repayments arise one can increase their ratios as per their judgement and goals.
For older individuals over 50 years of age, the investment horizon is relatively shorter and the preparation for retirement is necessary. Hence, one should increase their savings ratio of 50% of their income, and also avail investment options such as PPFs, Senior Citizens Savings Scheme and National Pension Scheme[2] can be beneficial investments to secure their financial stability.
The most important takeaway is that savings vs investment is often a symbiotic relationship where one's savings at a younger age can be used to invest in large scale, wealth growth investments in the future. The difference between saving and investment is in the purpose of the money being used in it. They are used interchangeably, but serve vastly different purposes. The bottom line however, is the need to navigate one's financial requirements with as much cognizance as possible so they can make the choice best suited for them.
For older individuals over 50 years of age, the investment horizon is relatively shorter and the preparation for retirement is necessary. Hence, one should increase their savings ratio of 50% of their income, and also avail investment options such as PPFs, Senior Citizens Savings Scheme and National Pension Scheme[2] can be beneficial investments to secure their financial stability.
The most important takeaway is that savings vs investment is often a symbiotic relationship where one's savings at a younger age can be used to invest in large scale, wealth growth investments in the future. The difference between saving and investment is in the purpose of the money being used in it. They are used interchangeably, but serve vastly different purposes. The bottom line however, is the need to navigate one's financial requirements with as much cognizance as possible so they can make the choice best suited for them.
Frequently Asked Questions (FAQs)
1. What is the difference between saving and investment?
The difference between saving and investment is in the purpose of the money being used in it. They are used interchangeably, but serve vastly different purposes. The act of taking a sum of money and consciously setting it aside for future purposes or as an emergency fund is called saving, whereas the act of putting funds in money-market, or investment instruments in order to aid capital growth on the basis of compounding interest rates, direct stock equity profits, mutual funds, or bonds or real estate is called investment.
2. What is the Risk comparison between saving and investment?
Since savings are often done independently by individuals preparing for a fixed expense they are expecting, there is no possibility of their funds suffering or deteriorating. Savings Accounts and Fixed Deposits are some of the most favoured methods of saving as they provide fund security and guarantee steady returns.
Market-linked investment plans however, have higher risk margins as they are directly affected by market-crashes or any other economically detrimental situation.
3. What are the tax benefits between savings and Investment?
Investment plans mostly offer better tax benefits than savings. The most predominantly trusted and effective tax saving investments available in India are PPFs, Fixed Deposit, National Pension Scheme, Senior Citizen Savings Scheme, and life insurance.
4. What is a better investment option for older investors?
For older individuals over 50 years of age, the investment horizon is relatively shorter and the preparation for retirement is necessary. Hence, one should increase their savings ratio of 50% of their income, and also avail investment options such as PPFs, Senior Citizens Savings Scheme and National Pension Scheme can be beneficial investments to secure their financial stability.
5. Which has more liquidity? Savings or Investment?
Investors who value and seek high liquidity and are more adept at being able to access their funds as per their requirement benefit from investing in savings instruments. However, the difference between saving and investment as per market-linked investment plans is to never pour one's emergency funds into the latter because of its unpredictability.
Sources:
[1] - https://www.indiapost.gov.in/Financial/pages/content/post-office-saving-schemes.aspx
[2] - https://www.indiapost.gov.in/Financial/Pages/Content/NPS.aspx
ARN No: Feb22/Bg/10A
