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A lot of people get confused between saving and investment. Both are two different terms which are used interchangeably. Now, let us understand “The Difference between Saving and Investment.”
What is Saving?
The portion of your income which is not consumed but keep aside for future emergencies is called saving. The primary objective of saving is not to earn income but to preserve the capital. So, money is kept in financial instruments with minimum risk (like saving account in a bank, Recurring Deposit, Fixed Deposit, Liquid Mutual Fund etc.) You earn interest income on your money but the main objective is to save the principal capital.
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What is Investment?
Investment is the process of letting your money work for you so that you can generate a return over a period of time. The ultimate purpose of investment is to create wealth which can be in the form of capital appreciation, interest-earning, dividend income, rental income etc.
The main objective of the investment is to generate wealth over a period of time. So, it involves greater risk. Higher the risk, higher the return. Investment involves buying the assets which have the potential for generating higher return like stocks, bonds, mutual fund and make you wealthier over the period of time. Since investing in these financial instruments involves greater risk, it is advisable to have a well-diversified portfolio.
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Difference between Saving and Investment
There is a lot of difference between saving and investment. You can’t create wealth just by saving money only. This is because the return from saving is much lower than investment. Investment is associated with a lot of risks that is why the return from these investments is very high in the long run.
- Saving is typically for small-term objective to meet short term goals say 1-3 years. However, investment is for the long-term objective.
- Saving is to keep money aside for future use. Investment is to utilise your money to buy high-return generating assets.
- The primary objective of saving is to preserve initial capital, however, the primary objective of investment to create wealth.
- There is easy access to your money by keeping your money in the savings account. On the other hand, you have to sell your investment to get your money back.
- With an investment, there is always a risk of losing money. Unlike savings, where there is no or comparatively fewer chances of losing hard-earned money.
The rate of return from saving is much lower as compared to return from any investment. So, saving can accumulate funds but it can’t create wealth. You have to invest your money in risk- generating productive assets to create wealth over the period of time. If you are young then you can take more risk, because you have a lot of time to recover from any losses.
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