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How To Know What's Right For You: Investing vs Saving

How To Know What's Right For You: Investing vs Saving

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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.

I often hear my friends using the terms investing and saving as synonyms, and I often correct them. Investing vs saving your money has a number of practical applications. For instance, saving would just mean setting aside some money for later use. Investing, on the other hand, is setting aside money with the specific intention of growing it. But more on that later. Let’s look at these in greater detail.

Firstly, what’s investing?

The first thing to know about Investing vs saving your money is that investing involves putting your money in assets with the goal of achieving gains or profits over a period of time. 

It is only in the long run that the power of compounding comes into play, leading to a higher return on investments (ROI). Experts recommend using a goal-based investment plan that helps identify the optimum financial instrument to invest in. 

Another aspect to the investing vs saving debate is that investing serves the purpose of life after retirement. For this, you may want to invest in something like the National Pension Scheme or the Public Provident Fund. On the other hand, if I simply want to watch the FIFA World Cup in Qatar later this year, I can just trade a few stocks.

So, how is savings different from investing?

Savings, typically, relates to the money parked in your bank accounts that is easily accessible in case of emergencies and regular expenses. Budgeting, monitoring and tracking expenses are the keys to saving successfully. It is a great practice, and the sooner one starts, the better. 

However, while extremely judicious, savings cannot generate a large enough corpus on their own. It’s important to recognise this difference between investing vs saving because here’s how investing comes into the picture. Investing in various financial products may involve risk but generate better returns to help build your corpus.

Your bank may give you an interest of just 3% but it assures you of the safety and ease of access to your money. Your PF is a balance of risk and returns and provides about 8.5% interest. Some investments in the equity market can even deliver 16-18%. Keep these numbers in mind in the context of India’s current retail inflation rate of 6.07%.

And what about trading? How is it different from investing?

Investing is buying and holding assets for a long period, and my long term investment cannot fulfil my goal of visiting Qatar in 2022 due to the long lock-in period. For this, I engage in the equity market via stock trading. 

Trading is a method of buying and selling stocks for a short period, which can be a few weeks, months, or even a day! Liquidity is the most significant advantage of trading. They can be sold online anytime, thereby meeting your near-term goals. Though trading can generate good returns in a short period, the risk involved is significantly high. So be aware of your risk appetite before indulging in trading.

Having said that, you can also hold on to shares for the long haul and build a substantial enough corpus using them.

And what are the types of assets I can invest in?

With an array of assets available, research and analysis are imperative before investing. Invest only after understanding the historical performance of the underlying asset and the risks involved.

The definition of best investment can differ for people depending on their own goals and risk profile. For me, it looks a bit like this (taking an investment kitty of ₹100,000 after deduction of monthly expenses and policy premiums):

  • Stocks - a.k.a. Shares or equities for pure equity market exposure, high risk. Amount committed - ₹25,000
  • Mutual funds - equity to Debt distribution ratio of 80:20 for optimal risk balance. Total amount invested - ₹30,000
  • Tax saving funds - ELSS and other similar funds providing equity exposure and tax benefits. Total amount invested - ₹15,000
  • Commodity - especially Gold, time-tested technique of hedging your portfolio from extreme market volatility or spike in inflation, amount invested - ₹15,000 via gold MF and ETF.
  • Savings account - remaining ₹15,000 in the bank as regular savings, short-term FD or RD for quick access.

I usually invest in SIP for small, monthly, fixed amounts for mutual fund investments. But, for windfall gains like the Diwali bonus or annual performance incentive, I divide the lump sum amount between the equity market and commodities like Gold. Only if this could happen more often, right?

Okay, then what are my options?

I’m sure you’ve come across the adages, “Never put all eggs in one basket”, and “one solution does not fit all.” They’re talking about diversification, and any financial expert will vouch for the importance of a diversified portfolio. By diversifying, you increase your chances of getting higher returns and reducing the risks. Let me explain my investment plan:

  • Savings / Salary account - for managing regular expenses, bill payments, shopping, and enough surplus for any emergency.
  • Long-term investments - to invest in tools such as pension funds, endowment-based life insurance, a provident fund for buying a house, post-retirement expenses, healthcare etc.
  • Short-term/medium-term: investments - investing in stocks and mutual funds with different attributes and features for buying a car, going on a vacation and, yes…seeing Messi in action. Live!

So, how do I begin?

If you’ve come this far, I won’t be surprised if you’re excited enough to begin your investment journey. Most financial companies offer the convenience of investing in their products online using your PAN and Aadhaar cards as proof. You can also invest directly via the fund house’s website or use aggregator platforms for more options. 

How to invest in the share market, you ask? By opening a Demat account, of course. Unlike mutual funds, which can be invested directly, a demat account needs a Depository Participant or a broking house as an intermediary.

On Fi Money, you can invest in Mutual Funds with just a few taps. Go to your Fi Money app, look for the ‘Mutual Funds’ tab on the home screen and follow the instructions on the app to start investing. You can also automate your mutual funds investing by setting up FIT Rules. These are condition-based investing rules that can invest on your behalf each time you shop online etc. 

Frequently Asked Questions

What is the relationship between saving and investing?

Investing vs saving your money is a common debate. Let’s put it this way: all investments are savings in some form, but not all savings are investments. This is because investments are geared towards growing your money for wealth creation. Saving, on the other hand, involves parking money aside in a bank account or a Deposit that you can easily access and withdraw as and when you need the money.

What are the 4 types of investments?

There are more than just 4 kinds of investments you can make, but here are the 4 most commonly used ones:

  1. Stocks: Where you buy or sell stocks of a publicly-traded company
  2. Bonds: Where you lend money to either governments, corporations, or trusts. The money is borrowed from you at a certain promised interest rate.
  3. Mutual Funds: Where you, along with other investors, pool in some money and have it invested in stocks and bonds. This is usually professionally managed by a fund manager.
  4. Banking products: This could mean deposits like Fixed Deposits, or Smart Deposits. These are offered by a bank or some other financial institution (NBFCs) to give you returns at a fixed rate.

How a beginner should start investing?

If you’re an absolute beginner to investing, the general advice is to start investing in Mutual Funds. You won’t need to do much research to start investing, nor will you need to worry about the risks. Mutual funds, unlike stocks, are a diversified set of investments that give you similar returns as a stock market portfolio, but with much lesser involvement on your part.

You could start by investing in Index Funds, which are a type of mutual fund that only invest in an index like the Nifty 50, for example. 

Why is investing money riskier than saving money?

When you invest your money, it can take a few more days to access your money compared to a savings account. Investing does not guarantee a return, and it is possible to lose some or all of the funds invested therefore, investing is considered more risky than saving.

Will I lose more money than I invest?

You won't lose more money than you invest, even if you invest in one company and it goes bankrupt and stops trading. This is because the value of a share can only drop to zero and the price of a stock can not go into negatives.

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