People have been saving money for a long time, whether in a piggy bank at home, an FD, or a bank account. Investing, on the other hand, is a relatively recent concept.
Defining saving and investing:
Savings refers to the portion of one’s income that is not spent and is saved in the form of hard currency or in a bank account or bank FDs.
This saved money can also be used to purchase other types of assets, with the intention of selling the asset at a greater price in the future. This is referred to as investing.
Saving money in a bank’s savings account earns some interest while placing it in a fixed deposit earns a somewhat higher rate of interest.
However, the interest rate on savings accounts and bank deposits has been lower than the rate of inflation and this is where investing comes in.
To understand the above statement better, When money is kept in the hard currency, it tends to lose purchasing power over time. To keep up with inflation, we need to earn some return on the money. That’s where investing comes in. said Gaurav Jalan, CEO, and Founder, mPokket.
There are numerous asset classes to invest or purchase but according to experts, the purpose of investing is to try to earn a larger rate of return than saving in a bank account.
Typically, assets are appraised using two criteria: risk and return.
According to Jalan, the Rate of return refers to the percentage earned on the amount invested, Risk can be defined as both volatility and the possibility of permanent loss of funds invested. Risk is also related to the length of time that one must remain engaged in an asset.
It is worth noting that, while the price volatility of some assets can be significant over a short time frame, the range of outcomes may be narrower over a longer time frame.
According to experts, when making an investment decision, the liquidity of an asset, or the capacity to sell the asset at a market price, should also be considered.
“If one requires funds quickly, it is generally not a good idea to invest in illiquid assets,” Jalan adds. Assets can range from extremely safe and highly liquid instruments such as money market debt funds to greater risk but liquid assets such as listed stocks to extremely high risk and illiquid assets such as venture capital.”
As a result, before selecting an item to invest in, each individual should comprehend each purpose.
Risks associated with both saving and investing approaches
The risks connected with savings and investing are determined by the investor’s goals.
The risk of relying solely on savings is the missed chance for wealth multiplication, steady and moderate growth, and the fixed cash flow required each month.
Industry experts say the risk connected with investment alone is the increased danger of loss owing to volatility in the underlying assets – gold, real estate, capital markets, or, bitcoins.