Everyone wishes to have a financially secured future. Financial security can have various purposes from buying a house, world tour with family, child’s higher education, marriage or post-retirement life. So what are you doing to secure yourself financially? Are you saving MONEY or INVESTING ? Let’s learn 5 key differences between saving and investing and what suits you the best.
Period
Savings are typically for small financial objectives to be met in a short period of time, say about 1-3 years! If you’re looking forward to buying a mobile phone or going on a small domestic vacation in the near future, saving might be a good option to meet such objectives. On the other hand, investing is a long-term plan for bigger financial goals.
Say you’re planning for your child’s education or wedding or your comfortable retired life which is due in about 5 or more years ahead, investing from now can make these goals achievable by the time the occasion arrives.
Access to money
At times of critical need, like medical emergencies, money savings serve as handy cash. You always have access to your money in savings and can withdraw a part of your savings or the whole amount as per your wish, but at times, you end up spending money you have easy access to. In the case of investing, access to your money depends on the kind of investment you make. Open-ended equity mutual fund schemes allow you to redeem your investments at any time.
If the investment period in an equity mutual fund scheme is more than one year, then the capital gain is exempt from tax liabilities. The government of India also provides a tax rebate for equity linked saving schemes (ELSS) u/s 80C of the Income Tax Act 1961.
Risk
If you have savings in reputed banks, your money is safer in the bank accounts than at home. Hence, the risk of losing money in savings is very low compared to any investment. Besides this, your savings are also entitled to interest. Investing mediums may involve risk of possible potential returns pertaining to the term of Investment or the market situations. Investing in the equity market comes with an inherent risk. One might lose money if not invested in quality stocks with companies that have long-term growth potential. Hence, it is advised to talk to expert financial advisors before you decide to invest.
Risk in investing varies according to the channels of investment. If your money is invested in good quality companies with long-term views, then short-term ups and downs should not affect your outlook towards such investments. Mutual funds provide the scheme details thereby indicating the possible risk involved. Investing wisely may give returns much higher than savings in the long run.
Returns
If you invest in bank fixed deposits, on an average, you may earn an interest of up to 8-9%. Interest on savings accounts is often much lower. However, the investments in equity based mutual fund schemes carry much higher potential for long term value growth. Quality investments have higher potential returns than regular savings if compared for a long term of about 5-10 years.
Choice
The right thing to do is to first identify your purpose. Why do you want to save or invest your money? Check whether your goals are short-term or long-term. It’s always wise to save money for small-term goals, emergencies, and casual expenses as it provides quick access. This makes it easier to meet small goals. But in the long run, consider your changing needs, limited income sources and inflation; savings may fall short of bigger financial goals. Remember you are planning for the future.
It’s advisable to start investing at a young age, but it’s never too late. Savings are for the present and investments are for the future. Investments are typically made for bigger financial goals, which may seem impossible now but would be possible in the future if they are wisely planned today. Investing smartly is the key to meeting such goals.
To conclude, your dreams don’t follow inflation rates. It is recommended to save for small-term goals, but investing simultaneously may make it simpler to achieve your long-term dreams.
(Viral Bhatt is the Founder of Money Mantra — a personal finance solutions firm)
