To SAVE or to INVEST?
Saving and investing are not one and the same,
although investors use the terms as substitutes
Most investors in India believe that the terms saving and
investing are same and so use them interchangeably.
However, a little bit of re search could show that there is a great deal of difference between what constitutes saving and what constitutes investing.
Savings is to keep money parked in those instruments which are less risky and have more predictability. Savings also means keeping money in instruments from where the investor could get the money at a very short notice. For example keeping money in a savings bank account is savings. From a savings bank account you can withdraw the money any time the account holder wants to, the money is very safe (with full or partial guaranteed also). But the rate of interest is mostly 4% per annum, which in some banks may go up to 6%. This rate of interest, however, is usually below the rate of inflation. Saving also means the person is more interested to preserve the money that he has at present.
Investing, on the other hand, means making one's money work harder to generate returns greater than one could get in case of savings. So if a bank customer is willing to invest part of his money kept in his savings bank, say in a liquid fund, which, in the last one year earned returns in the range of 7% to 8%, that would be investing.However, investing also means sacrificing part of the security that comes with savings for the chance to earn higher returns. So investing brings in some element of risk with one's money, financial planners and advisors say. Investing also means taking some risks when one puts money in mutual funds, bonds, stocks etc. in which there is some chance of losing the money one is investing. In case of investing, compared to preservation of one's money through savings, here the aim is also wealth creation over the long run.
Now the question is if one should simply settle for saving or opt for investing and take some risks. To decide on this, one should have some idea about how inflation plays a key role in our life. Now suppose if some article today costs Rs 100 and the rate of inflation is 6% per annum, a year from now the same article will cost Rs 106. Now if one decides to buy the same article one year later and puts that Rs 100 in his savings bank account that gives him 4% rate of interest, after a year he will have Rs 104. However, when the person is ready to buy that article after a year, the cost of the article will be Rs 106. So the person will have a Rs 2 shortfall. Now instead of keeping the Rs 100 in his savings account, if he invests the money in a liquid fund that gives him 7% return, after one year he will have Rs 107. So at the time of buying the article the person will have money to fully meet the cost of the article.
Now if one extends this logic to a family's monthly household expenses and a high rate of inflation, one could realise that merely savings may not be enough to meet the family's future expenses. The situation could turn even worse if one tries to depend on his savings during his retired life. The solution to this problem is to invest with the objective of beating the rate of inflation. Investing judiciously can ensure an investor that he has enough money even after accounting for the rate of inflation, financial planners and advisors say.
Now there are several options to invest. The first step for a would be investor should be to take some amount of risks which could be just a tad more than the risks associated with saving. Financial planners and advisors say that liquid funds could be the first investment product one could aim for. These are low risk products which invest in instruments which carry low risks and high liquidity. The next step could be short term bond funds, then long term bond funds, then government securities (Gilt) funds, and then monthly income plans by fund houses. The next step in the risk hierarchy should be to invest through balanced funds, then exchange traded funds, large cap equity funds, diversified equity funds, midcap funds, small cap funds and finally sectoral funds.
To make things easier for investors, every fund house is mandated by Sebi to spell out clearly the risk profile of each mutual fund product and investor should take note of the same while investing, financial planners and advisors say.
However, a little bit of re search could show that there is a great deal of difference between what constitutes saving and what constitutes investing.
Savings is to keep money parked in those instruments which are less risky and have more predictability. Savings also means keeping money in instruments from where the investor could get the money at a very short notice. For example keeping money in a savings bank account is savings. From a savings bank account you can withdraw the money any time the account holder wants to, the money is very safe (with full or partial guaranteed also). But the rate of interest is mostly 4% per annum, which in some banks may go up to 6%. This rate of interest, however, is usually below the rate of inflation. Saving also means the person is more interested to preserve the money that he has at present.
Investing, on the other hand, means making one's money work harder to generate returns greater than one could get in case of savings. So if a bank customer is willing to invest part of his money kept in his savings bank, say in a liquid fund, which, in the last one year earned returns in the range of 7% to 8%, that would be investing.However, investing also means sacrificing part of the security that comes with savings for the chance to earn higher returns. So investing brings in some element of risk with one's money, financial planners and advisors say. Investing also means taking some risks when one puts money in mutual funds, bonds, stocks etc. in which there is some chance of losing the money one is investing. In case of investing, compared to preservation of one's money through savings, here the aim is also wealth creation over the long run.
Now the question is if one should simply settle for saving or opt for investing and take some risks. To decide on this, one should have some idea about how inflation plays a key role in our life. Now suppose if some article today costs Rs 100 and the rate of inflation is 6% per annum, a year from now the same article will cost Rs 106. Now if one decides to buy the same article one year later and puts that Rs 100 in his savings bank account that gives him 4% rate of interest, after a year he will have Rs 104. However, when the person is ready to buy that article after a year, the cost of the article will be Rs 106. So the person will have a Rs 2 shortfall. Now instead of keeping the Rs 100 in his savings account, if he invests the money in a liquid fund that gives him 7% return, after one year he will have Rs 107. So at the time of buying the article the person will have money to fully meet the cost of the article.
Now if one extends this logic to a family's monthly household expenses and a high rate of inflation, one could realise that merely savings may not be enough to meet the family's future expenses. The situation could turn even worse if one tries to depend on his savings during his retired life. The solution to this problem is to invest with the objective of beating the rate of inflation. Investing judiciously can ensure an investor that he has enough money even after accounting for the rate of inflation, financial planners and advisors say.
Now there are several options to invest. The first step for a would be investor should be to take some amount of risks which could be just a tad more than the risks associated with saving. Financial planners and advisors say that liquid funds could be the first investment product one could aim for. These are low risk products which invest in instruments which carry low risks and high liquidity. The next step could be short term bond funds, then long term bond funds, then government securities (Gilt) funds, and then monthly income plans by fund houses. The next step in the risk hierarchy should be to invest through balanced funds, then exchange traded funds, large cap equity funds, diversified equity funds, midcap funds, small cap funds and finally sectoral funds.
To make things easier for investors, every fund house is mandated by Sebi to spell out clearly the risk profile of each mutual fund product and investor should take note of the same while investing, financial planners and advisors say.
Happy Investing
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