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Difference between Savings and Investment Plans

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Difference between Savings and Investment Plans
December 15, 2023

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If you’ve just started your first job or received a promotion with a pay hike, you might be looking for ways to create a secured financial plan. With both savings and investment plans as potent options, picking one over the other requires a thorough assessment of their differences.

In this article, we assess how savings and investment plans work and how they differ to help you make an informed financial choice.  

What is a Savings Plan?

Saving involves setting aside money for future expenses or life goals. Most people usually deposit savings into their savings accounts to ensure easy accessibility during an emergency. A systematic savings plan helps you build a corpus over time to meet your goals.

There are varied savings plans and products available in India to suit your goals. For instance, you can opt for goal-oriented savings with pension policies for effective retirement planning.

Check for best pension options in India that provide flexibility in premium payments, ensuring a steady income during retirement. Alternatively, you can consider savings-cum-insurance plans over traditional instruments like FDs and RDs to build a corpus and secure the financial future of your loved ones with guaranteed death benefits.

What is an Investment Plan?

Investment plans help grow wealth over time through disciplined, systematic investments in various assets like stocks and bonds, catering to different risk appetites. Tailored options offer strategic flexibility, allowing high-risk investors potential market-linked returns and low to moderate risk investors the choice of mitigating risks with debt and hybrid funds.

Difference between Savings and Investment Plans

Here’s an overview of the chief differences between savings and investment plans:

Goal

Savings plans suit short to medium-term goals (1-3 years), like a vacation, while investment plans, with compounding, target long-term aspirations (5-10 years), such as education or buying a home.

Risks

One of the chief reasons for favouring the savings route is the safety of this avenue. Saving your funds in a bank account poses little to no risk. Opt for the safety of savings if you prioritise a risk-averse approach. Bank accounts and conservative savings plans provide a secure haven for your funds. Conversely, investments entail market-linked risks, with volatility impacting returns. However, the risk quotient varies depending on the investment avenue you pick. For instance, equity funds and stocks are riskier than debt funds.

Liquidity

When faced with a financial or medical emergency, you can easily cash out on your savings. Since savings plans offer immediate access to reserves, they are deemed to be the perfect vehicle for building an emergency fund. In contrast, investment plans limit access to your corpus with varying locks-in periods and withdrawal norms. For instance, you can withdraw your invested funds from direct stock investments anytime, while tax-free withdrawals from the National Pension Scheme require a three-year wait.

Returns

Savings plans offer stable returns through products like savings accounts and deposits, while market-linked investment plans provide the potential for higher returns with market volatility. Return levels vary based on the chosen option, correlating to risk levels; for example, equity funds carry a higher risk-to-return balance than government bonds.

How Much Should You Save or Invest?

Deciding on how much to save and invest is an entirely personal choice, but considering the following pointers can help you figure out the right balance:

Write Down Your Goals

Begin by defining your financial goals and time horizon. For an emergency fund, choose a low-risk savings plan. Opt for an investment plan for long-term goals like funding your child’s education. Leveraging the long-term time horizon of these plans helps balance out market volatility and yield better returns.

Assess Your Income

When deciding between savings and investment plans, consider your monthly income and expenses like EMIs, rent, utility bills, etc. You can also rely on the 50-30-20 rule, where 50% of your paycheck goes towards essential expenses, 30% towards things you want, and the remaining 20% is saved or invested.

Wrapping It Up

Acknowledging the difference between savings and investment plans helps you align your financial plan with your goals and needs. Ideally, your well-rounded financial plan should have both an emergency reserve that pays for unexpected circumstances and risk-balanced investments that bring inflation-beating returns. A healthy balance of savings and investment can be instrumental in securing your financial future. 

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal Vishal Subharwal

Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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