To add to this, most of our parents were enthusiastic ‘savers’ whose financial planning – be it their children’s education/marriage or their retirement corpus, usually included Gold, FDs, PPF, LIC money-back policies etc. Huh.
This childhood conditioning is easily visible in the way most of us interchange the use of these two words when speaking. However, beyond that, the result is that our ‘attitude’ towards money also becomes conditioned to think that saving and investing are the same thing.
Saving and investing are very different concepts, and knowing the difference is the key to executing a successful financial plan.
Let us understand this through some of the key aspects that we usually look at before deploying our hard earned money:
- time horizon:Savings is ideally a fund that you can use whenever the need arises. It could happen tomorrow; It could be a year from now. Unforeseen events like job loss, sudden hospitalization, etc. are typical events where you may require these funds.
It is generally advised to set aside 4-6 months of monthly expenses for this purpose. On the other hand, investments are meant to help you meet your long-term goals. These are tools that can help you build wealth. You ideally would not dig into these funds in the short term, even if there is an emergency.
- Expected return: When we save, we are not looking to make a profit. We are looking at conserving capital so that we are not short of funds when we need it the most.
However, when we invest, we aim to make good profits, build wealth and generate inflation-beating returns over the long term.
- Risk taking ability:The sooner we need the money, the lower the risk. However, we also need to understand that generally the lower the risk, the lower the return.
Since the saving time is very short, we should mostly opt for very low risk and liquid instruments. Although the returns may be low, we do not have to worry about losing money or not withdrawing it when needed.
However, for our investments, our mindset is focused on longer time horizons as well as greater returns. This is why we can take calculated risks. While due diligence should be done when choosing our investments, there is substantial research that indicates that risk and volatility outweigh the average over the long term, giving us reasonable, inflation-beating returns.
- Available Products: Savings accounts, FDs, short term debt mutual funds are some of the instruments that can be used for savings. Equity mutual funds, stocks, real estate, gold etc are the instruments in which you will invest to fulfill your long term goals.
In short, we need to understand that while saving is an important and essential part of your portfolio and financial planning, it cannot be your only strategy to manage your money.
- Wealth and Inflation: Beating returns can only be achieved through planning your finances in such a way that you do not have to depend on the ‘investment portion’ of your portfolio to meet emergency needs or day to day expenses.
Once you are successful in doing this, you will be more open to allowing your money to spend time in the market. It will also help you relax when you see short-term volatility in the value of your investments and prevent you from panicking and withdrawing at market lows.
Last but not least, although it may seem like a self-serving individual in my profession, I cannot overstate the importance of using the services of a financial advisor. Not only can they help you choose the right tool for your specific needs, but a good advisor will also help you calm your nerves during the down-cycle of the market and keep you disciplined on your way to getting rich.
Happy investment!
Views are personal: The author is Biju Mohan, Director, Canny Finserv from Hyderabad
Disclaimer: The views expressed are those of the author and are personal. TAML may or may not subscribe to it. The views expressed in this article/video are in no way intended to predict or time the markets. The views expressed are for informational purposes only and do not constitute any investment, legal or taxation advice. Any action taken by you based on the information contained herein is your responsibility alone and Tata Asset Management will not be liable in any way for the consequences of such action by you.
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