When questioned about the difference between investment and savings, a person will probably answer that both are the same. This common misinterpretation is due to the lack of proper information. They might be aware of various banking and savings schemes but won’t know the investment concept. You can only gain a perfect understanding of both concepts by understanding their difference. Here we will discuss the six differences between investment and savings.
To understand the difference between investment and savings, let us first learn about investment. An investment is a product purchase whose value will change with time, most preferably increase over time.
The next step to understand the difference between investment and savings is to know about savings. Savings are a mode of setting aside or reserving money through personal safekeeping or bank deposits. While inside a safe, the money is not used to purchase anything, and most of the time, it remains dormant. There is a nominal interest rate on the money in bank deposits, but it doesn’t value much.
Top 6 Differences Between Investment and Savings
Several factors differentiate between savings and investment. Some common points in investment and savings are vaguely distinguishable, while some other points are prominent in the difference. While the former is the reason for misconception between investment and savings, the latter will clear all your doubts. Read and know about the six key factors that explain investment vs savings.
The significant difference between investment and savings is their definition. Investment means a monetary contribution to purchase an asset partially or wholly. Usually, the asset is a known and promising product whose value will increase or decrease with time. In contrast, savings are personal safekeeping or money deposition methods. The savings money is not used anywhere; it just remains there without much use.
2. Account Needed
Another way to differentiate between savings and investment is the type and need of account required for transactions. You need to have a brokerage account to start investment savings in shares, commodities, and the stock market. To start simple savings in a financial institution, you will require an account in that particular institution.
Returns are one of the main factors that helps you differentiate between savings and investment. There is no limit to returns from investment in stocks; it all depends on the likeability of the product. And in savings, the returns are minor and limited compared to the investment, sometimes even lower than the inflation rates.
Risk is a crucial element that can help you distinguish between savings and investment. In investment, the risk element is too high. Even the capital amount invested can lessen due to a decrease in the product’s value, whereas in savings, risks are almost zero.
The goal of putting money can also differentiate between savings and investment. The purpose of an investment is to obtain high returns and the goal of savings is to protect the capital amount.
The time required to generate returns from investment vs savings is also different. An investment in a good product can generate returns within a short period, sometimes even within a few months. However, the period required to generate profits from savings is long-term, occasionally more than a few years.
Now you must know the critical differences between investment and savings. After considering all the points, the winner in the fight of investment vs savings is an investment. Apart from the risk element, all the positive factors belong to investment. It is possible to mitigate this risk by adequately studying the products before investment.
*Tax benefits are as per the Income Tax Act, 1961, and are subject to any amendments made thereto from time to time
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