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Savings Vs Investing: Know the Difference

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Created on
April 29, 2022

Summary

What’s Inside

If you’ve just started earning, you might have questions like ‘what is saving and investment?’ or ‘should I save my income or invest it?’ Understanding the difference between savings and investment can help you find answers to these queries and create optimised personal finance strategies to build an emergency fund and a corpus of wealth over time. 

What is Savings?

Savings refer to the funds you set aside to meet future expenses or tackle emergencies. In India, people save by depositing funds into a bank account or fixed deposit scheme to interest over time. You can save for various reasons, like funding a vacation, buying a car, or creating an emergency fund to help you in tough times. 

What are the Pros and Cons of Savings?

Pros

Cons

Low to zero risk involved. 

Low returns.

Creates an emergency fund for your rainy days. 

Doesn’t bring inflation-beating returns.

Ideal for short-term goal financing. 

 

What is Investing?

Investing refers to parking funds in assets like stocks and bonds that will help grow your money through capital appreciation. While investing comes with a higher risk quotient than savings, it also offers the possibility of higher yields. Most people use goal-based investment strategies to meet long-term financial goals, like buying a house or building a retirement corpus.  

What are the Pros and Cons of Investing?

Pros

Cons

Compounding and reinvestment ensure higher returns.

High risk in the short-term. 

Ideal for long-term goal financing. 

You may need to stay invested for a long-term time horizon.

Brings inflation-beating returns.

Discipline, commitment, and expertise are needed to see high returns. 

A diversified portfolio can bring you risk-adjusted returns.

 

Differences Between Saving and Investing 

The following table sums up the differences between savings and investments. 

Parameter

Savings

Investing

Definition

Funds are set aside in liquid and safe accounts to meet future expenses.  

Funds are invested in assets with a motive to earn future profits. 

Products

Savings bank accounts and FDs.

Stocks, bonds, gold, mutual funds, and real estate. 

Risk 

Zero to low.

High.

Objective

Build a corpus for rainy days.

Wealth creation through capital appreciation.

Suitable for

Meeting short-term goals like buying an appliance or an unforeseen emergency.

Meeting long-term goals like funding your child’s education, building a retirement fund, etc. 

Time horizon

1-3 years.

5 years or more.

Returns

Nominal returns in the form of interest. 

High inflation-beating returns.

Difficulty 

Easy. Anyone can start a savings bank account. 

Complicated. In-depth research, monitoring, and portfolio shuffling needed. 

Which is Better: Saving or Investing?

Based on these savings and investing differences, it is clear that both are valuable building blocks of an air-tight financial plan. While you can fall back on savings for short-term goals and emergencies, investing can help secure long-term goals and build wealth over time. That said, the risk aspects of each also differ greatly. You can find the right mix between the two by evaluating your financial goals, risk appetite, and income. If you need help, you can always rely on an expert like Fi Money. 

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Frequently Asked Questions

1. What is the main difference between savings and investment? 

Saving money is to store it away until you need it, while investing refers to the purchase of assets with a desire to earn profits and grow your wealth. 

2. How does saving differ from investment in terms of risk and return? 

Typically, savings bring you low returns against zero risks, while investments come with higher risks and a potential for higher returns. 

3. What are some examples of savings vehicles and investment vehicles?

Common savings vehicles in India include savings bank accounts, FDs, and RDs, while stocks, bonds, mutual funds, and ETFs are common investment vehicles. 

4. Why is it important to understand the difference between saving and investing? 

Understanding the difference between savings and investing can help you better manage funds and design a better financial plan. 

5. How can an individual determine whether to save or invest their money?

You can choose between the two by assessing your current needs and future goals. For instance, if you don’t have enough saved to cover 3-6 months' worth of expenses, it's best to prioritise that over investing for long-term goals. If you have an emergency fund in place, you can start investing. 

Disclaimer

Investment and securities are subject to market risks. Please read all the related documents carefully before investing. The contents of this article are for informational purposes only, and not to be taken as a recommendation to buy or sell securities, mutual funds, or any other financial products.
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