Saving is not enough. Invest!

Most of us have grown up listening to famous quotes about saving money, such as “save for a rainy day”, “a rupee saved is a rupee earned”, or some with an emotional touch like “save money and money will save you”. However, hardly any of us would have heard of similar quotes on investing!

To add to this, most of our parents were ardent ‘savers’ whose financial planning – be it their children’s education/marriage or their retirement corpus, would usually entail Gold, FDs, PPF, LIC money-back policies, etc.

This childhood conditioning is easily visible in the way most of us interchange the usage of these two words when we speak. However, what’s more, consequential is how our ‘attitude’ towards money also ends up getting conditioned to think that saving and investing are one and the same thing.

Saving and investing are very different concepts, and knowing this difference is one of the keys to executing a successful financial plan.

Let’s understand this through some key aspects that we usually look at before deploying our hard-earned money:

• Time horizon:Savings are ideally funds that you would use anytime as the need arises. It could be tomorrow; it could be a year from now. Unexpected events like job loss, sudden hospitalisation, etc. are typical events where you could need these funds.

Usually, it is advised to keep 4-6 months of monthly expenses aside for this purpose. Investments, on the other hand, are meant to help bring your long-term goals to fulfilment. These are the instruments that can help you create wealth. You would ideally not dig into these funds in the short term, even if there is an emergency.

• Return expectation: When we save, we are not looking at making profits. We are looking at preserving capital so that we are not short of funds when we need it the most.

However, when we invest, we aim to make handsome profits, create wealth, and achieve long-term, inflation-beating returns.

• Risk-taking ability:The earlier we need the funds, the lesser should be the risk taken. However, we also need to understand that usually, the lower the risk, the lower the returns.

Since savings have a very low time horizon, we should mostly choose very low-risk and liquid instruments. While the returns may be low, we don’t have to worry about losing money or not being able to withdraw it when needed.

For our investments, however, our mindset is more returns focused, along with having a longer time horizon. This is why we can afford to take calculated risks. Though due diligence must be carried out while choosing our investments, there is enough research that indicates that risk and volatility average out over the longer term, giving us reasonable, inflation-beating returns.

• Products available: Savings accounts, FDs, short-duration debt mutual funds are some of the instruments that can be used for saving. Equity mutual funds, stocks, real estate, gold, etc. are instruments you would invest in, for meeting your long-term goals.

In summary, what we need to understand is that, while saving is an important and necessary part of your portfolio and financial plan, it cannot be your only strategy to manage your money.

• Wealth and inflation: beating returns can only be achieved through planning your finances in a way that you don’t have to depend on the ‘investment part’ of your portfolio to meet emergency needs or day-to-day expenses.

Once you succeed in doing this, you will be much more open to allowing your money to spend time in the market. This will also help you relax when you see short-term volatility in the value of your investments and will prevent you from panicking and withdrawing at market lows.

Last but not the least, though it might seem self-serving from a person in my profession, I cannot overstate the importance of using the services of a financial advisor. Not only can they help you in choosing the right instruments for your specific needs, but a good advisor will also help you by calming your nerves during a market down-cycle and keeping you disciplined on your way to getting wealthy.

Happy investing!

Views are personal: The author is Biju Mohan, Director, Canny Finserve from Hyderabad

Disclaimer: The views expressed are of the author and are personal.TAML may or may not subscribe to the same. The views expressed in this article/video are in no way trying to predict the markets or to time them. The views expressed are for information purposes only and do not construe to be any investment, legal or taxation advice. Any action taken by you on the basis of the information contained herein is your responsibility alone and Tata Asset Management will not be liable in any manner for the consequences of such action taken by you.

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