Investment vs Savings: Key differences and when to choose
New Delhi: Savings and investment are two different concepts that people usually misjudge. You need in-depth knowledge of both plans to see the difference between savings and investment. Wondering what is the difference between saving and investing? Let’s first understand what each term means. Keep reading to know the details: Investment It refers to the […]
New Delhi: Savings and investment are two different concepts that people usually misjudge. You need in-depth knowledge of both plans to see the difference between savings and investment. Wondering what is the difference between saving and investing? Let’s first understand what each term means. Keep reading to know the details:
Investment
It refers to the asset or any valuable item acquired to generate income or appreciation. It refers to the process of using money or capital to buy the assets that can help you develop a safe and acceptable rate of return over time. Some investment options include stocks, bonds, mutual funds, derivatives, real estate, and anything that can produce income, usually in the form of interest or rents, among others.
Savings
Savings refers to the amount left after spending from the disposable income. It is the money you put aside for future use rather than spending immediately to meet short-term needs. Savings helps to keep you financially secure during uncertain, unpredictable times. Money can also be saved with the motive to purchase expensive items that are too costly to buy with monthly income.
Investment vs Savings
Now that you know what investment and savings mean, here is the difference between savings and investment.
Meaning: Investment is the process of using your money with the aim of making it grow in a specified time. While savings refers to putting money aside gradually, especially into a bank account, with the motive to stay financially secure during emergencies.
Purpose: Investment is specially made with the motive to provide returns and helps in capital formation. To fetch the best investment result, you must do thorough research before investing. At the same time, savings are made with the motive of fulfilling short-term and urgent requirements.
Risk: Savings is a risk-free plan with no risk associated with losing money. If you are a risk-averse individual and want to make your money grow and stay saved for uncertain times, you must always prefer saving. Whereas, at the same time, investment is a bit risky option. Therefore, it requires profound research to predict whether the investment will be fruitful or not–the more the risk, the higher chances of gaining a considerable amount. Thus, for risk lovers, investment is the best option.
Returns: Since investments are risky options; therefore, they even fetch comparatively higher returns to the investors compared to the savings return, which is either zero or significantly lower.
Liquidity: It’s challenging to fetch the cash from your asset instantly, or in case you need instant money. Therefore, the investments are less liquid. At the same time, savings are highly liquid since you will have cash ready in your hand to meet immediate requirements.
Below is the table to summarize the difference between savings and investment Characteristics –
Savings:
Account Type: Bank
Returns: Fixed returns
Risk: Risk-free option to save your money Products: Savings accounts, CDs
Time Horizon: Includes a shorter tenure
Liquidity: Most liquid form
Investing:
Account Type: Demat account, ULIP plans
Returns: Comparatively higher returns
Risk: Risk-prone (invest based on your risk appetite) Products: Stocks, bonds, mutual funds, assets, ULIPs
Time Horizon: Longer tenure, i.e., at least five years and above Liquidity: Less liquid, as you need time to get cash in hand from the amount you have invested Conclusion
Savings and investment both have their importance and the requirements dictate which way to go. You cannot randomly choose to go for savings or investments. You have to know the difference, understand the pros and cons and then take a decision. Now that you know the difference between savings and investment, you must make an informed decision regarding where you must invest your money. You can save for your emergency and invest for achieving long-term financial goals.
