Saving vs Investing
They’re not the same!
A common mistake investors make is to confuse saving and investing and perceive both as the same activity. This post helps you understand the nuance between these two related but independent activities.
When we do not spend a portion of our disposable income, we save it. The objective of saving should be to meet a short term goal, one that can be funded primarily with our own money. It might be that holiday you are planning for, a tablet you want to buy or for a rainy day. Since the objective of saving is to meet a short term goal or contingency that might arise, it is important that the all the saved amount be available to us when we need it, at short notice. Hence one should park such funds in minimal risk instruments like liquid mutual funds or short period fixed deposits where the risk of capital loss is zero.
On the other hand, we invest to meet long term goals like funding child’s education or saving for retirement. Investing involves saving small amounts of money on a regular basis and using it to buy assets that will generate returns over a period of time. Since the goal of investing is to meet a large monetary outflow after an extended time frame, it is prudent to invest in securities that offer a higher rate of return. Long term bank fixed deposits, mutual fund investments in bonds and equities and stock market investments are all preferred routes for investments. As the monetary requirement is not in the near term, investors should approach the investment goal with a higher risk tolerance and not worry if the investment temporarily drops in value. Usually any amount that need not be accessed for at least the next five years can be considered for investment purpose.
Let’s understand more with an example — read on at smalltalk, our resources portal.
