The terms savings and investments have often been used interchangeably, as both of them involve earning a certain amount of returns over a period of time. Although it cannot be denied that savings do earn you a certain amount of income, especially speaking in context of bank accounts, we should understand that the act of saving money has a completely different foundation compared to investments, regardless of the relation between the two.
To begin, let’s define how savings and investments are interpreted in the financial world.
The word saving refers to the process of keeping aside a specific portion of monthly income, allowing you to access it as and when needed, in the shortest time possible. The savings may grow marginally if stored in a bank account for a long period of time. In most cases, savings are done for meeting immediate expenses of the family, especially in emergency situations.
On the other hand, investments refer to the process of allocating a part of your monthly income to financial products in the hope that they’ll earn you handsome returns and grow your wealth to help you meet your different life stage goals. Although investment is a fairly broad term, it generally works under the principle of making your hard earned money work for you and making it deliver returns of whatever kind.
How are these two different from each other?
There are few important factors that differentiate savings from investments: liquidity, risk factor and types of assets.
Types of schemes or assets
Savings normally involve safest financial assets like current or savings accounts in banking establishments. Any money deposited into the safe vaults can also be categorised as savings. On the other hand, investments involve allocating ones funds to stocks, mutual funds, gold, real estate or in asset that doesn’t normally guarantee fixed returns. The returns from investments are dependent on market conditions, companies’ performances and overall economic sentiment.
Unlike investments, savings are low-risk in nature, implying that your chances of losing your hard-earned money through savings are pretty low. Savings are not as volatile as investments, even after taking inflation into account.
Investments on the other hand involve a certain degree of risk. In fact any asset that delivers better returns than bank deposits generally has a certain level of risk. Although you can always find low-risk investments, they don’t deliver the kind of rewards that are normally expected from investments.
Liquidity is the ability of converting your saving/investment into hard cash, without losing out on its value. Savings are comparatively more liquid than investments and can be accessed at any point of time. You can use them as an effective backup for any emergency situations.
Investments on the other hand are involved in the act of building wealth and may not be as liquid as savings. An ideal an efficient investment is one that grows bigger and bigger with passage of time, making the most of the compounding effect. Withdrawing money from investments normally takes a few days’ time.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.