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Finance

Why is investing better than saving?

Many of us consider investing and saving to be the same. While both terms are interchangeably used, they are as distinct as cheese and butter. Savings refers to the difference between your income and expenses. However, investing is when you earn the benefit of compounding by frequently parking your savings in different asset classes like bonds, real estate, stocks, gold or simply by opting for mutual fund investmentNPS option or investing in the stock market.

Example 1:

In a 20 over cricket match, no. 5 batsman walks in the 6th over. Here, the player’s job is to first keep his wicket intact and then concentrate on scoring runs. As saving is crucial for investing, in this instance too it is crucial for the 5th batsman to save the wicket to score later. While he can save the wicket by batting in a defensive mode and avoid even the possible shots, he will not be able to head towards victory by following this tactic. He will score very low with this tactic. For his team to win, he will have to, at times, hit a few boundaries by taking some amount of risk.

Likewise, to accumulate a huge corpus to meet your crucial financial goals and attain inflation-beating returns, you will have to take certain degree of risks. Here is where investing comes into the picture. Investing is all about calculative risks and measures to manage the same risks. Investing in NPSmutual fundsstock market – all have certain risks attached owing to their market linked nature.

Example 2:

Karim puts a specific amount of investible fund aside every month from his income after meeting his monthly mandatory expenses. This amount that he puts aside every month is saving. The next step is, he parks this fixed amount per month in mutual fund investment through an SIP. This is called investing.

Example 3:

Alan is a self-employed individual who parks his money in a savings account. This act is called savings. However, on better performance of a particular industry stock of his preference, he invests in the stock market from the funds parked in his savings account. However, note that for this, he follows one of the popular business dailies that presents daily stock market reports under the headline ‘stock market today’. After going through the stocks to buy today report, he does a complete analysis. Once satisfied with his analysis, he puts in his funds in the industry stock that he thinks would perform well. This act is called investing.

Go through this table to understand the difference between the two terms:

Savings Investing
​Savings is either held in hand or in a savings bank account. While cash in hand may generate zero returns, cash parked in savings accounts will earn a nominal return. ​Investing is when ​savings​ are​ invested in different asset classes or investment options like NPS, mutual fund, stock market etc.
Savings assist to mitigate short term financial goals like purchasing a gadget or going for a vacation. Investing funds assists to meet mid and long term crucial financial goals, which may include accumulation of down payment to avail car loan, generate adequate child’s higher education corpus or post retirement corpus.
Savings can simply be liquidated in cash form through ATM cash withdrawal or other modes. Thus, this has little or no risk involvement. As investment is market linked in nature, it may include risk, such as fluctuating interest rate risk or chances to suffer losses due to economic or other conditions. However, such risks can be managed through strategic planning.
Funds parked in savings bank accounts earn low interest. Investing funds has the potential to earn inflation beating returns and help attain adequate financial goal corpus faster.

Final thought

While savings can be done to attain short term goals and build emergency funds as it provides easy liquidity and capital protection, investing must be done to accumulate inflation beating returns for your long-term financial goals. It is because savings in bank accounts has zero potential to generate higher returns to meet long term financial goals within a determined time horizon.

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