Savings and Investments


By

S. Shankari
B.E, MBA, PGDHRM, (Mphil)
Faculty Member in Finance
R.L. Institute of Management Studies
TVR Nagar, Aruppukottai Road, Madurai-625022
 


Most of us use the word 'savings' and 'investments' as synonyms. But there is a substantial difference between these two words and at the same time some similarities also there in between these two.

Savings:

* Savings is the simple process of putting aside a part of our earnings, usually in the form of cash in hand or savings account, or in the form of some high liquid instruments. Eg. Bank deposits, postal savings…

* By savings in the banks, we may earn interest and feel secured because of the growth of our money.

Investments:

* Investment is spending money (or capital) to purchase an instrument or asset that generate secure and reasonable returns, income or capital appreciation over a period of time.

* Investment may provide income and capital gains with proper management of the risk involve in any form of investment. Eg. Investment in gold, real estate, equities etc.,

Why Investments rather than savings?:

* Saving is a passive activity whereas investment needs an active role in nature.

* Suppose if one person's monthly income is Rs.10000, and he want to purchase an asset worth of Rs.10000 means, he could start saving Rs.2000 for the next five months, and complete the purchase .So, we can say that expenses with a short time horizon need savings.

* Similarly he needs to save money to pay his insurance premium that falls due for every six or twelve months. In that case, insurance is the investment and it is used for long term objectives.

* Sometimes these two processes will be linked with each other and very difficult to differentiate each other. For example, we may save money to buy a jewel, house or any other asset but buying of that asset includes investment. So, we can say that saving ends with investment.

* So, it is absolutely important to understand that investment and savings are two different things and need a different approach.

* Finally the decision to choose between saving and investment lies within individual investment preference. While both vehicles provide risk and returns, the choice is up to the individual to find the one that suits their profile, whether risk averse or otherwise.

* Example: If we are earning Rs.1,00,000/- means,90% of us will deposit the amount in our bank account to earn interest periodically, and also to keep safe. By depositing in bank, we will get only 7% per annum as interest. But our current inflation rate is 10.86%. So, we will get only negative real returns. So, try to save money and convert that savings into investments, which will give a return that should be more than our inflation rate.

Some tips for savings:

* Keep a record of the total income and its sources

* Keep a record of the current expenditure.

* Plan the expenditure

* Cut down the excess expenditure

* Try to generate additional income and don't spend it.

Some tips for investments:

* Set the objectives for the investment as regular return / capital appreciation / Tax benefit / Retirement benefit /Children's marriage etc.,

* Decide about investments, after analyzing the risk/ safety levels and liquidity level of the instrument based on the need.

* After considering all these factors, invest the money

* Restructure or rebalance the investment when it is necessary.
 


S. Shankari
B.E, MBA, PGDHRM, (Mphil)
Faculty Member in Finance
R.L. Institute of Management Studies
TVR Nagar, Aruppukottai Road, Madurai-625022
 

Source: E-mail December 8, 2010

          

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