People often use the terms ‘saving’ and ‘investing’ interchangeably. However, both concepts are different. Saving is to accumulate money over time. This money can be set aside in a bank (or a locker) to be used for future needs as and when they arise.
Investing, on the other hand, is a strategy to increase your financial wealth over a period. Here, you use your money to buy assets that deliver returns. This helps you to meet various goals such as buying a car or going on a vacation to a foreign country.
Saving vs Investing
Savings accounts in banks offer an interest rate of 3.5% per annum. That means if you invest Rs. 10,000 in a savings bank account, you would earn an interest of just Rs. 350 at the end of the year. And, given that inflation is around 4-5%, you could lose money over time.
When it comes to saving vs investing, investing is better since you can earn higher returns by investing your money. Mutual funds, for instance, offer anywhere between 10-15% returns per annum on an average. This allows you to earn inflation-beating returns.
Different investment options
There are many investment opportunities available for investors. The stock market, gold, real estate, bonds and mutual funds are a few examples. However, you may want to invest in an avenue only after you consider factors such as your investment goals, risk appetite and monthly budget. For example, stocks promise high returns but they come with a high degree of risk. Hence, it may not be a good idea to invest in stocks if you are a conservative investor. Instead, you could invest in mutual funds to take care of your various investment goals.
Power of compounding
Compounding occurs when the returns on an investment start yielding returns. Mutual funds allow investors to enjoy the benefits of power of compounding efficiently. When you invest in a mutual fund, you can reinvest your dividends back into the fund to purchase more fund units. By doing so, you are earning profits on your principal and dividends. This offers you the dual benefit of obtaining higher gains over time and increased fund value.
Start investing early
The best way to maximise your profits is to start investing as early as possible. Here’s a simple example to highlight the importance of investing early.
Imagine you want to create a corpus of Rs. 1 crore towards your retirement. If you are 25 years old, you would need to invest Rs. 2,700 in mutual funds (10% rate of return) through Systematic Investment Plan (SIP) to achieve Rs. 1 crore. However, if you delay your investment by a period of 10 years, you would have to invest Rs. 7,500 per month to reach the same goal. And if you start investing at the age of 45, you would need Rs. 24,000 each month to reach Rs 1 crore by age 60. This is how compounding works when you start investing early.
There has been a tremendous change in people’s perception towards investment options like mutual funds over the past few years. Advertisement campaigns like ‘Mutual Funds Sahi Hai’ by the Association of Mutual Funds of India (AMFI) have resulted in more people investing their money. In 2019, you can consider investing money to ensure a secure future.