Saving vs. Investment

Saving has been the method most people employ to put away for a rainy day; but that habit might just be becoming redundant. Growing needs and a growing economy have made investing a far more sensible choice. Saving refers to simply accumulating your money, whereas investing essentially means using existing wealth to earn more wealth.


Savings, in general, is money collected in a bank account. These are relatively of low risk and offer easy liquidity. However, the gains accrued are also relatively low. In India, savings usually mean having cash in a Savings Account. Returns from your savings account ranges from 3.5% to 4% per annum. Bombarded with an average inflation rate of 5% per annum, your money's buying power will actually dwindle. Even on a fixed deposit offering about 8% per annum, the gains may amount to a meagre 3% after adjusting for inflation. On the other hand, investment vehicles like stocks have been known to outrun inflation and give substantial returns over time. Therefore, for more ambitious financial goals, you should rather invest than save.

You need to think of investing as a payment you make to yourself for your future. It should be the first positive step towards attaining your dreams. An ideal investment plan would allow you to maintain your current lifestyle. You would thus be allowing your money to grow without compromising too much on your spending habits.

Investing has one vital factor in its favour, i.e., the concept of Compounding. In a Savings Account you gain only on the principal amount put in. However, when you invest, your interest earned works with your principal amount, giving you an earning, more than the previous year and so forth.

Lets say your principal amount is X, and with your investment giving you an approximate annual interest rate of 10% your annual interest earned is Y. Then the following year you will earn interest as 10% of X + Y. Therefore, if you re-invest your earnings and let it grow over a period of time, you may end up with a sizeable amount.

The above calculations are for illustration purposes only. Returns assumed at 18% p.a. Past performance may or may not be sustained in future. Internal calculations.

The table above shows us how compounding helps make a modest investment of just Rs. 12,000 a year, into a money-churning machine. By the end of year 10, you would have earned a good Rs. 3,36,528 by just investing a total of Rs. 1,20,000.

Before you begin your journey towards investing, it makes sense to have an amount equal to 2 (or more) month's salary for unforeseen circumstances like a personal crisis or unexpected unemployment. You can then plan toward reaching your goal. If an investor aims to buy a car for Rs. 10 Lakhs in 2 years, he needs to invest in a plan that allows him to invest a certain amount of his salary every month in investment plans that can give him enough returns to garner the said amount; in this case it could be equities which have been known to give higher returns in a relatively shorter time-frame. However, please read the chapter on Risk and Asset Allocation, before you take your investment decisions.