To save or To invest – that’s the question!

Saving and investment patterns of people around the world have gone through rapid changes in the last decade. Higher disposable incomes, more avenues for entertainment, a culture of instant gratification and changes induced by the social media have rewired the way we think of money and savings. Today, there is better access to financial planning and investments coupled with aggressive marketing by all players. The choice has left most investors confused, instead of inspiring them. Investors are faced with a paradox of choices and it drains energy. It is precisely to stop this drain that Mark Zuckerberg wears the same T- shirt to work every day. Where should I park my savings or start my investments in? Is my investment secure with this Fund Manager or should I keep it in a safe in an FD?; which avenue offers better returns? How risky is this avenue? How will the equity markets ups and downs affect my portfolio?

Here it’s wise to stop and understand the primary difference between saving and investing first. Saving and investing are two unique concepts, and it’s important to understand the difference between them and the need for each. Saving is a short term thing, involving the protection and preservation of money from loss. You save for your daughter’s marriage happening in a year, you save for your son’s college fee or your house down payment. Your time horizon is usually less than 3 years. Investing, on the other hand, means to make a long-term commitment of redirecting some of your savings and letting it grow. We assume there is risk involved, such as the inevitable downturns in the market; however, over the long-term (ten years or more) those dips are expected to smooth out into an overall upward growth pattern.


Good financial planning involves creating a holistic view of your income, expenses, goals and values, risk management, as well as an investment strategy. Everyone’s financial needs based on our life stage, age, lifestyle, fixed expenses, family arrangements, children’s age, salary, risk appetite, etc are different. Also, we should understand that most of us don’t have the time to constantly keep checking our investments like our parents used to. Many of us save and forget. We may have investments that are not liquid (real estate), not trackable. Different asset classes yield differently over time. Some lose sheen and we need to pull out of them. These are things that we should understand along the way.


‘Save for a rainy day’ –  this is a phrase the ants and most Indians used to swear by. With the E-commerce boom in India, we’ve turned into a nation of shopaholics. The glamour of instant gratification overpowers the wisdom of saving for a rainy day. Typically, savings is, setting aside a part of your income to meet short term expenses that will happen within 5 years. Your main goal is capital preservation here. One expects low risk, low volatility, high liquidity and also low returns for one’s saved cash.

Default Saving through Banks:

Unfortunately, in all developed economies and in most emerging economies, saving is no longer the smarter option. Falling interest rates on bank accounts– some countries like Japan, have negative interest rates – have taken the sheen off from keeping your money in the bank.

This has quite negatively impacted the Western world, where default saving through the Bank account is no longer an option. It has been researched that people tend to save more when it’s easy to do so. With the Government making it difficult to save, most people in America have become poor savers and most people are ill prepared for retirement.

To add to the woes of the G20 countries; in 2014 their leaders declared that the Cyprus model of “bail – in” should apply globally.

Small saving schemes:

Small savings schemes are not far behind in yielding low returns. In the Indian context, the present government has recently announced rate cuts across small savings schemes (see chart below). There are chances that the RBI will (over the next few years) cut the repo rate further, thus allowing banks to reduce their interest rates on both deposits and loans.

India Small Savings Schemes

India Small Savings Schemes


The biggest factor against savings today is inflation, something that most people fail to take into consideration when making financial decisions. The result – they end up becoming victims of what economists call ‘money illusion’.

A lack in understanding the difference between “nominal changes” as against “real changes which reflects inflation” is money illusion. Let us look at an example. Most people I know invested in the 5 year National Savings Certificate which offered an interest rate of 8.50%. Average inflation for the period between 2010 and 2015 stood at 8.91%. The real rate of return on this saving scheme actually was negative (inflation rate less interest rate); a loss of 0.41% in the purchasing power of the money saved. The scenario was the same across the other small saving schemes and bank deposits. Taken over a long term, the Equity market has been the only instrument which has beaten inflation. Over long term, stocks act as stable as bonds.


“Invest today for a better tomorrow” –  this is the sum of all wisdom. Stocks and stock mutual funds are generally considered to be excellent long-term investment options. For the majority of the last century, stocks have produced some of the best returns when compared to virtually every other investment available. But over a short time frame (under five years), they can be quite volatile and dangerous to an ill-prepared portfolio because stocks – and the stock market in general – have historically experienced short-term drops in value.

But, what do Indians invest in? The chart below shows how Indians distribute their money among various asset classes.

Household Financial Assets

Household Financial Assets

  •  Life Insurance Fund encompasses State or Central Govt. Employees Insurance funds as well as postal insurance
  • Shares & Debentures encompass investments in shares/ debentures of non-credit/ credit societies, mutual funds (excluding UTI’s specified undertakings), and public sector bonds.

As can be seen from the chart, our distribution of money is pretty skewed. The primary reason for this is our risk aversion. Indians are comfortable investing in less risky instruments like debt, real estate and Gold. But with gold and real estate generating less returns, equities are gaining investor confidence.

In India, there are numerous avenues for investments in short, medium and long term investments. However, very few would know which investment offers the best rate of return? A comparison of different investment options shows that an investment in the equity market offers the maximum return. Yet we have one of the lowest participation rates of domestic investors in our capital markets. The lack of confidence of retail investors reflects on the poor participation rate. The following chart indicates the same in all clarity:


So, are we losing out on our power of investing? Research shows that when investors do not trust the capital market, they are unlikely to save and invest for their future and achieve their long term financial goals. But that will come with a huge disadvantage. People will have lower quality of life and may have to work longer and will have intergenerational stress. The capital markets actually offer a wonderful wealth creating avenue. If more people have trust, more people will participate in the capital markets. More liquidity = more growth and price discovery mechanism will work more efficiently.

Let us look at an example of the returns from Rs 1 lakh invested in each of these different avenues 35 years back.

Returns of FD Vs Gold Vs Sensex

Returns of FD Vs Gold Vs Sensex

*Average annualized inflation over 35 years. 

** Annualized rate in real terms after adjusting for inflation.

Note: Unlike other investments, Sensex also gives dividend yields. Assuming a dividend yield (reinvested) of 2% on average, returns from Sensex works out to 4.05 crores.

 As can be seen clearly from the above chart, the returns from investing in the Sensex are far better than any of the others. However, a word of caution is required – investments have to be made with a long term perspective. Equity markets move up and down and it requires immense staying power to remain invested and ride the market.

If you have ‘saved for the rainy day’, well the rainy day has arrived. With its strong presence in the Emerging Market Index, the Indian equity market will continue to see larger amounts of global funds being invested here. Indian investors are also slowly changing and reacting to this reality by investing more in equity and equity related instruments.

Read more about the latest trends in Indian investing.




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Arvind Daga

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