The difference between ‘investment’ and ‘savings’2 min read . Updated: 22 Oct 2017, 11:32 PM IST
Once we pay off our expenses from our income, what's left is what we typically call savings
Often, we have heard of financial planners, advisers and also mutual funds peddle words like ‘saving’ and ‘investment’. But did you know that savings and investment are two separate concepts?
Every month, most of us earn an income. This could either be in the form of our salary or business income. Then, we also have our expenses like food, clothing, rent, electricity and telephone bills, and so on. Once we pay off our expenses from our income, what’s left is what we typically call, savings. Obviously, the more we save, the better. And we must always aim to curtail our expenses, but there are always some expenses we just can’t avoid, like paying rent or a loan instalment. If the aim is to create wealth, then saving alone is not enough. We have to do something more with our savings.
That’s where investments come in. These are financial instruments that help us increase our money over a period of time. We need to invest because the cost of living goes up every year. It’s called inflation. In other words, the value of money goes down. Say, you save Rs10,000 in present times, every month. If you leave this Rs10,000 as it is, it would buy fewer and fewer things as the years pass by. That’s because money loses value over time, and prices of goods and services go up. That’s why your money also needs to grow—and preferably at a pace faster than inflation—to be able to afford at least the same things that you could buy once upon a time. That’s where an investment helps.
A mutual fund is a classic example of an investment. On offer are equity funds and debt funds. But remember, you need to ascertain how much risk you can take. There are investments that grow at a very fast pace, and there are those that grow at a slower pace, but still give returns that are more than inflation.
Fixed deposits and small savings instruments like Public Provident Fund are also forms of investments.
Not every investment instrument is suitable for everyone. If you are in the highest tax bracket, a fixed deposit would not give you returns exceeding inflation. Your money doesn’t grow at a meaningful pace and therefore it doesn’t necessarily do what a typical investment ought to be doing to your money box. But if you are in the lowest tax bracket and you are risk averse, then a fixed deposit works for you.
Putting money away in a savings bank account can be classified under ‘savings’ but not ‘investment’. This is because in a savings bank account, your money lies idle. Too much savings and too little of investment doesn’t create wealth.
In fact, with the proliferation of liquid funds and the instant redemption facility that many of them have started to offer, your savings, too, get a boost if you transfer your excess savings to a liquid fund account and keep a bare minimum in your bank account.
But even a liquid fund is just a parking vehicle; a savings vehicle. That is not investment. You need a basket of equity and debt funds, as per your risk appetite, as investments for wealth creation.