Share Market

The primary difference between Savings and Investment is the association of a risk factor with the latter which is completely absent in the former. Money saved in deposit accounts such as Fixed Deposits or Savings Accounts is safe from risk as the money is merely stored in order to back the Financial Institution’s loan Operations. However money invested is inevitably used for some sort of transaction. The money thus exchanges hands to buy a commodity/stock and then sell them when the price is higher.

There is of course a level of abstraction in the process so the customer can easily see what his investment was and what he got back, and not be aware of how the returns(if any) happened. The bank takes care of procuring the source of stock/commodity, buying it and selling it when the customer demands. The customer only knows what category of commodities/stocks were purchased e.g.: Gold, Silver, Electronics and not know which actual companies they were purchased from. The total value of all companies or dealers is then calculated and after procuring its own share, the company then avails this to the customers.

The important question is when to save and when to invest? As stated, Investments have no guarantees of returns. It may yield high returns, moderate returns comparable to Savings Accounts or actually have a loss. However safe an investment might sound, it is nevertheless impossible to determine in prospection the success of an investment since it is governed by various market forces and non-deterministic events. As a rule of thumb it is a bad idea to invest money if it is positively needed in the future, for repayment of debt on a house, for medical purposes, etc. Only extra money should be used for investments: Money that won’t be missed. In other cases it is better to save it in a deposit account.
Is it better to save all the money, instead of investing in the first place? To answer this question we must analyze the ROI rate of both. Savings Accounts offer a constant 8% rate of Interest. Investments can offer up to 18% over long term. 8% Risk free on Savings sounds good until you adjust for inflation.

The truth is a fixed amount of money will buy you less and less of a good over the years as the price of goods increases. In retrospect, Sugar was available for Rs. 10 a kilo 5 years back. Now it costs over Rs. 30. The average rate of inflation in India is 5%. So the net ROI on deposits is: 8-5 i.e. 3%. If the ambition is to augment one’s wealth, one has to seriously consider investing; otherwise Savings will merely provide enough to survive.