Investors in India are bit confused between the concept of savings and investment. There is a thin line of difference between savings & investment that everyone must understand to manage their financial goals.
Do you know, 90% of retail investor thinks investing means saving money in Bank Locker or FD or keeping money in Post Office Saving Scheme? Is it true meaning of Investing? The answer is No. A Big NO my friend.
There is a huge difference between Investing & Savings.
Let us understand both one by one with crystal clarity that no one has given you till now.
First of all you have to understand that when it comes to investment or savings, there are Financial Instruments in which we either invests or save money.
Financial Instrument are type of monetary contracts between parties to the contract. It simply means any financial product based on money which carries interest on that money or capital appreciation. Bank FD, Equity Shares, RD, Debt Funds, Equity Funds, PPF etc. all are the examples of Financial Instruments active in our Indian Financial System.
So let’s understand 2 most important questions:
1. What is Investing?
Investing simply means, putting your money/capital in the Financial Instruments in order to earn Capital Appreciation & Interest or Dividend or Rental income from that invested amount.
So that means, Investment in Gold, Equity Shares, Equity Oriented Mutual Funds, and Property etc. are examples of Investing Activities where we will earn Capital Appreciation and Interest/Dividend/Rental Income etc.
For Eg 1. : If Mr A invests his money Rs. 10 Lakhs in some Property in Noida, near Jewar Airport (to be established in next 10 years).
So here Mr. A is expecting that within 10 years once airport shall be established in that case property rates shall multiply itself, also in those 10 years he can earn rental income out of that.
For Eg 2: If Mr A. invests his money in Sovereign Gold Bonds for 10 years. It means he is expecting appreciation in Gold Prices between those 10 years and he will also earn 2% p.a. interest on these Bonds.
2. What is Savings?
Saving simply means putting your money in any Financial Instrument to earn regular Interest Income and not with expectation of Capital Appreciation.
So that means, FD/RD in Bank, Money in Saving Bank Account, Deposits in PPF etc all are examples of Savings Activities. These activities do not appreciate your capital, it can only give you regular income.
I hope that you have completely understood about the difference between Investing & Saving, that both are totally different from each other.
In order to summarize there are the following instruments in which we can either save or invest money for future:
- Bank FD/RD – Savings
- Gold/Silver – Investing
- PPF – Savings
- Property – Investing
- Equity Shares – Investing
- Equity Mutual Funds – Investing
- Debt Mutual Funds – Savings
- Gold Bonds – Investing
- Crypto Currencies – Investing/Speculation
- Commodities – Investing/Speculation
- Post Office Saving Scheme – Savings
- Insurance Policy – Neither Savings / Nor Investment
To read more about – Mutual Funds & Bonds
Above mentioned list is only generic, there may be other financial instruments in which people do invest/save money in order of capital appreciation or to earn regular income.
Alright, Great. Now you have understood the basics of Investing & Savings.
Now, let’s discuss about why should we save or invest our money?
- The answer to this simple question is to beat Inflation. As we all know, what we used to purchase from Rs. 10, 10 years back, now we are buying the same thing in Rs. 30/50/100.
- So in order to cope up with the rising inflation we have to put our money/earnings on work, so that it can grow itself by investing/saving in any Financial Instruments.
- Now, let us assume our Inflation rate in India is 7%, that means every year products/services are getting costlier by 7%, which means If you were buying something for Rs. 100 last year, it will become Rs. 107 in the coming year. This will lead to less purchasing power in hand of Retail Investor.
- To cope up with above situation we need to invest or save our money so that it can earn sufficient enough to beat the inflation and your purchasing power should remain same.
- Ideally any rational or knowledgeable person should invest in such financial instrument which can fetch him ROI i.e. Return on Investment > Inflation Rate i.e. 7 %.
- So he should research about the Financial Instruments those who are giving more than 7% p.a. return, he should invest or save money in that particular financial instrument.
- I hope you have got the message about why should you invest.
Related: Best Performing Large Cap Funds
Here is a small activity for you, just do the following things:
- Note down the vegetables rate 10 years before and write it against the rates today.
- Note down the FD rate 10 years before and write it against the rate today.
- Note down the Salary Hike Percentage you are getting each year from last 10 years and write it against the Inflation Rate every year.
- Note down the School Fees of your child or yours 10 years before and now for the same class.
Related: Taxation of Mutual Funds