A look at various investment options available for an investor, some important questions need to be tackled. Do the two words “saving” and “investment” mean the same thing? Or are they different words? If these are different things, which is better – saving or investing? Such a clarification is warranted since many individuals use the two terms interchangeably.

The word “saving” originates from the same root as “safe”. The safety of money is of critical importance here. Whereas, when one invests money, the primary objective typically is to earn profits. The important point to note here is that there is a trade-off between risk and return.

The other difference is evident from the dictionary definition of “saving”– reduction in the amount of money used. This definition refers to reducing consumption so that some money is saved. It is this saved money that can be invested. In other words, saving and investing are not to be considered as two completely different things, but two steps of the same process – in order to invest money, one needs to save first. Thus, saving precedes investing.
Saving can also mean putting your money into products such as a bank time account.
Investing — using some of your money with the aim of helping to make it grow by buying assets that might increase in value, such as stocks, property or shares in a mutual fund.

Factors to evaluate investments
The three most important factors to evaluate investments

  • Safety

  • Liquidity

  • Returns.


  • Safety: 

This begins with the safety of capital invested. However, one could stretch that to also include the degree of surety of income from investment. In order to understand the safety of an investment, it is important to understand the risks involved.


  • Liquidity: 

How easily can one liquidate the investment and convert it to cash? The degree of ease is different across different categories, and even within the categories, the same could be different across products. Sometimes, the nature of the product could be such that selling it is difficult, whereas sometimes there could be some operational features, e.g. a lock-in for a certain period, after which one may be able to liquidate the investment; or a penalty for early exit. While such a penalty does not hamper liquidity, it only lowers the investment returns. Another aspect that one may also want to look at is the divisibility. Is it possible to liquidate part of the investment or is it necessary to sell the whole thing?

  • Returns:

As seen earlier in the definition of investments, the major purpose is to get some returns from investment. Such returns may be in the form of regular (or periodic) income, also known as current income; and capital appreciation, or capital gains.

The current income is receivable periodically, without having to sell the investment, whereas the capital gains can be realized only when one sells the investment.

The exit charges, or penalty would bring down the returns, as seen earlier. Hence, whenever there are any such charges for early withdrawals, the same must be considered as a trade-off between liquidity and returns.