Why it is important to understand the difference between investment and savings

For almost 90 percent of the people, the meaning of savings and investment overlaps to a great extent. A sound financial plan includes both savings and investing, but they’re not the same thing! Investment and savings are very different. Saving is actually the difference between income and expense. While investing is allocating part of the savings towards assets (putting money in market-linked avenues like equities and bonds) to create long term investment and earn returns.

Saving generally results in you earning a lower return but with virtually no risk. It may involve putting your money in relatively zero-risk, non-linked instruments like life insurance savings plans, PPF, fixed deposits, etc. Saving money also implies putting an amount aside for later use. The major difference between saving and investing is the level of risk taken. Saving and investment are both important when you want to build a solid financial foundation, but one must understand the differences and when it’s best to save compared to when it’s best to invest!

“When you use the words saving and investing, the majority of people believe it’s exactly the same thing,” says Sanjeev Jain, Senior Partner at Tata AIA Life Insurance. However, when you think of saving, think of products that are generally offered by banks such as savings accounts, fixed and recurring deposits. And when you think of investing, think of stocks, bonds and mutual funds, Sanjeev explains.

Let us understand some more differences between



savings and investments:

Duration
The money put aside for savings means it is available when we need it and it has a low risk of losing value. The purpose of savings could be creating a fund so that the money saved could be immediately used for a vacation, to pay for surprise or emergency expenses. Mostly, people set savings in savings accounts or fixed deposit accounts in banks or similar types of financial companies.

Investing is a conscious act of putting money in stock markets, mutual funds, bonds or real estate etc. with the intention of yielding higher returns. In investing, money is locked in for a longer period. Financial instruments that have a lock-in period of more than a year are considered long-term investments.

Risk
As discussed in the above paragraphs, savings are generally risk free. However, the returns are minimum but at the same time the chances of losing your money are very low. People use their savings during turbulent times. The risk is variable with investing. Investing products such as stocks can have much higher returns than savings accounts and FDs. However, the risk factor in market-linked investments is always present and there is always a possibility of highest losses incurred at the time of a fluctuating or volatile market. Mutual funds, Unit Linked Insurance Plans or investments in indexed funds are considered safer options.

Returns
Saving is definitely safer than investing, though it will likely not result in the most wealth accumulated over the long run. But, in tough times, savings will come handy. Financial experts suggest having three to six months worth of expenses set aside in an emergency fund.

The returns on investing fluctuate a lot. There’s always a good chance you will lose money at least in the short term as the value of your assets fluctuates. According to experts, one should let money stay in an investment account for at least five years, in order to ride out any short-term downdrafts. Hold your investments as long as possible, but that means not accessing them. Investing can be complex - it is therefore advisable to take help of an expert.

Liquidity
The savings money is highly liquid as it is held in easily accessible accounts, but that is not the case in investing. It is important to understand that savings are done in order to use funds out of it during surprise or emergency situations while investments are not to be used as emergency funds. Therefore, any avid investor will understand that in order to earn a decent return, a long time horizon (ideally of many years) is what is required.

To get benefits from savings and also investing, you will first have to cultivate a wonderful saving habit.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the author. We do not give investment advice or encourage you to adopt a certain investment strategy. What you decide to do with your money is up to you.