What are investment plans?
Investing directly can be risky, as not everyone is equipped to analyse and predict the performance of different assets. Investment Plans are financial products designed to create wealth for investors over the long term, provided you invest in a disciplined manner. Investment plans help you invest systematically in different asset classes, i.e. equity funds, debt funds or a combination of both, to achieve future life goals. The allocation in various funds is handled by professional fund managers, which helps in reducing the risk and multiplying wealth creation over time. You can also choose to manage your funds, provided you are equipped and are willing to do so.
There are various investment options in India available to suit your needs based on your risk appetite and life goals. The time frame in which you want to achieve your life goals is one factor you need to consider before deciding on the right investment plan. Inflation is something one needs to be wary of as well, hence it becomes necessary to make smart investment choices to ensure you pick an investment plan that can help you combat inflation.
What are savings plans?
Savings Plan is a traditional endowment life insurance plan that enables you to accumulate a corpus in a systematic manner over a long term to meet your life goals. Savings Plan has elements of insurance as well as wealth creation. The life insurance cover enables you to secure your loved ones in your absence, and the wealth creation component enables your investment to grow just like in investment plans.
Savings plans allow you to opt for a participating plan or a non-participating plan, where a participating plan allows you to enjoy the benefits of the policy in terms of bonuses, if declared,and a non-participating plan comes with guaranteed* returns. Bonus is not applicable in a non-participating plan.
Savings vs investments: Key differences
In common parlance, the words savings and investments are used interchangeably. But the investment horizon, risk, return on investment and liquidity are the key differentiators between savings and investments. The same parameters differentiate savings plans from investment plans. However, there is no clear demarcation between savings plans and investment plans. Let us take a look at the basic differences between savings and investments.
Savings vs Investments
| Differentiating parameters | Savings | Investments |
|---|
Time horizon
| - Savings plans can help you meet long-term goals or can come in use during future emergencies.
| - Investments are long-term commitments to assets like debt funds, equity funds or a combination of both that generate returns over time.
- Investments are made to protect and increase the value of savings in the long run
|
Returns
| - Savings Plans are of two types, Participating and Non-participating.
- Participating savings plans reward long-term customers with bonuses, if declared and non-participating savings plans offer guaranteed* returns.
| - Investment plans are generally market-linked and usually offer higher returns, but have a longer timeline.
- Hence, you need to remain invested for a longer term to be able to maximise the returns.
|
Risk
| - A savings plan could be a good choice if an investor is not willing to take a higher risk and is able to digest a moderate risk instead over the long run
| - The risks associated with investment plans are higher as the money is invested in market-linked products
|
Why should you opt for an investment plan?
When comparing savings vs investments, there are various reasons for choosing an investment plan.
Wealth creation: Investment plans are generally a preferred tool for wealth creation. The money committed to investment plans can multiply manifold over the tenure of the plan, provided you stay invested. The accumulated corpus at the end of the investment tenure can be used to achieve important life goals.
Potential to generate High returns: Long-term investment plans invest the money into market-linked instruments, i.e. in equity funds, debt funds or a combination of both, which have the potential to generate higher returns over the long term. Coupled with the power of compounding, investment plans generate substantial returns over the years.
Why should you opt for a savings plan?
Investment plans are a popular option for people with a substantial corpus, seeking a high rate of return. For people with a lower tolerance for risk, savings plans are the ideal option. Plus, when you use the tips for tax-saving plans, you can reduce your tax liability too. Here are a few reasons to opt for a savings plan
Moderate risk: Savings plans are for those who do not have a high risk appetite. One can invest in a participating savings plan if they want to receive extra benefits like a Bonus, if declared or can simply opt for a non-participating savings plan, which offers guaranteed* returns without any bonus component.
Savings plus life insurance cover: Part of the premium goes towards a life insurance cover, and the rest is invested in a conservative portfolio of bonds and other fixed income securities.
How Should You Split Your Money Between Saving and Investing?
When assessing savings vs investments, the choice boils down to your goals, risk appetite, investment horizon, and investment strategy. You can combine both savings and investments to enjoy the best of both worlds.
When it comes to splitting your money between savings and investments, there is no fixed rule. You can split in a ratio that aligns with your financial plan. If you are a risk-taking investor, you can allocate a larger portion of your money towards investments, and if you are risk-averse, a larger allocation to savings plans would be better.
So, assess your needs and risk appetite and make the right choice.
Factors to Consider While Selecting Between Saving and Investing
When choosing savings v/s investments, some factors can help you make the right choice. These factors are as follows -
Risk appetite
Always choose between savings and investments based on your risk appetite. This would help you understand what to expect from your investments and be prepared. For instance, if you don’t mind taking risks, you can choose market-linked investment plans like ULIPs. However, if you want to avoid risks, fixed-income savings plans would be a better fit.
Financial goals
Saving and investing also depend on your financial goals. It is better to earmark each financial goal with a savings or investment plan. For instance, you can choose child insurance plans to save for your child’s future or retirement plans to create a retirement corpus.
Investment horizon
Your investment horizon would also determine the choice of savings and investments. You can consider long-term assets for a long-term horizon, but if you want to save up for a shorter tenure, you can choose short-term avenues.
Liquidity
Liquidity means the ease of converting your assets to cash. Some assets, like equity, mutual funds, etc., offer easy liquidity, while others, like PPF, FDs, etc., might have restricted liquidity. So, choose avenues that match your liquidity needs.
Key takeaways
- Saving and investment are two different concepts which should not be used interchangeably.
- Life insurance savings plans include endowment and money-back plans that help you create a secure corpus for your goals without market risks.
- Life insurance as well as market-linked investment plans include ULIPs that help you with life cover, earn market-linked returns and also offer flexibility.
- Savings and investments differ from one another on the basis of time horizon, risks, and returns. So, when assessing where to invest money, know the differences between the two.
- Choose between savings and investment plans depending on your financial goals, risk appetite, and investment horizon.
Conclusion
Before investing in a savings or investment plan, it is important to figure out the right options that suit your needs. Conduct adequate research and invest as per your requirements and the resources at your disposal. Without long-term commitment, it is not possible to get the desired results. Hence, invest wisely and in a disciplined manner to get your financial goals and Life Goals Done.
FAQs
How does the level of risk vary between savings and investments?
Savings are considered safer since there is no market exposure and the returns are stable. Investments mean allocating your savings to market-linked avenues, which might be risky.
What are the key differences between savings and investments?
Saving plans aim to create a corpus for your short-term to mid-term goals and have lower risks. Investment plans aim to create a corpus for your long-term needs and have higher risks compared to savings plans.
How do returns on savings compare to returns on investments?
Since savings plans do not have market exposure, they offer stable returns. Investment plans are market-linked and offer returns subject to market performance .
Are savings accounts completely risk-free?
Savings accounts offer guaranteed interest on the account balance and are, thus, risk-free.
Which financial goals are better suited for savings?
Short to medium-term financial goals, like planning for a trip, buying a car, buying a home, etc., are better suited for savings plans.
Can I do both—save and invest at the same time?
Yes, you can save and invest at the same time since there is no restriction. However, the allocation to savings and investments should be governed by your financial needs, goals, and risk appetite.
