As Indians we are not very entrepreneurial by nature. Most of us salaried people like to live life the way we want with the limited amount of resources that we have and whatever excess remains there, we prefer to stock it. Similar is the scene in the case of businessmen and self employed people as well. Some people stock this money in the hopes that by storing a small amount of money over a long period of time we will be able to accumulate a large sum. This large amount may be used to purchase the expensive item of your choice or kept aside to be of use in difficult moments.
Now while stocking up this money any people say that they are saving for the future while others claim that they are investing for the same. While for the layman the two may appear to be synonymous, in reality it is far from being so. This article explores the difference between saving and investment.
Investing is the process of putting in money in capital assets (like mutual funds, SIPs, real estate and so on). All of this is done with the aim of earning profits. On the other hand, savings is merely the portion of your monthly income that is excess in comparison to your needs and is not used for consumption.
For those of you who think that savings and investment is the same thing, one of the fundamental differences between the two lies in its purpose. Investments are made over a long term and to reap the complete benefits of the same one need to wait for a prolonged period of time. On the other hand, savings are done in order to meet short term or urgent requirements.
For those who want to play it safe, savings are the options. There is virtually no risk involved here. Investment options run at a range that allows you to make a pick from medium to very high risk. Based on the plan that you choose, there is appropriate risk to your money. It is to be noted that here one might lose money if the same is not invested in quality stocks. Hence if you are unaware about how the financial system works, it is advisable that you seek the help o financial advisors before making your investments.
The golden rule of money management says that the higher the risk involved, the greater are the returns. Thus investment offers you the option of very high returns whereas savings gives you extremely low or negligible returns. Thus, simply put, savings is something that is opted by people who want to play it safe and are not really interested in seeing their money grow. The maximum returns that one can expect on a savings account is 5 to 6 % whereas a fixed deposit investment will give you something close to 8 or 9%
As is obvious from the nature of storing money, the liquidity of savings is way higher. In case of an investment you cannot really expect much of liquidity. Thus if you feel that the money that you are stalking up may be needed in times of critical needs then you must know that all your money in savings can be used as handy cash. The same cannot be said in the case of investments. Here access to ready cash depends on the type of investment that you are making.
• Tax benefits
There are some forms of investments that offer tax benefits. In the case of equity mutual funds, if the period of investment is greater than that of a year the capital gains will be exempted from income tax. This income tax exemption comes under 80C of Income Tax Act 1961. On the other hand, savings do not offer any form of income tax rebates.
Savings is typically done for a short period of time. Ideally this is about 1-3 years. For things like buying a mobile phone or going on a short vacation in the near future one would opt for savings. On the other hand if you want to save or your newborn child’s education or marriage, you would rather go for an investment. Ideally an investment is done for a period that is greater than 5 years.