CASE STUDY

Savings vs Investment

I lost all my savings in the stock market scam of 1998. “I lost all my savings when CRB
Capital markets shut down.” Or if you want something current then try - “I lost all my
savings in the ‘New’ economy meltdown of 2000.” Make no mistake- these are painful
statements. All through our lives, we have been repeatedly advised that we must save money
for a rainy day. And when we did just that, some of us have suffered the misfortune of losing
it all. A penny saved...... is a penny earned is what I was told by my favorite English teacher
in middle school. Unfortunately that penny doesn’t get us very far anymore. Nobody told me
about the silent enemy called inflation that could lay waste to the coin that the tooth fairy left
under my pillow. Incidentally I was also taught how to calculate interest by an excellent but
stern Mathematics teacher. But at that point I did not comprehend that it (interest) was my
best weapon against that stealthy enemy (a simple preference for English over
Mathematics?). Realisation dawns In High School I was introduced to the dismal science of
economics and the world of basic finance. That is when it all fell in place - the way to
safeguard my savings from inflation was to put it in the bank or invest it somewhere. So that I
could earn a rate of interest higher than inflation and protect my money. Life rolled on I
entered the workplace at the age of 22. The saving habit came naturally to me. What with all
those sayings ringing in my head - a penny saved...I was determined. I wasn’t going to let
that sneaky character ‘Inflation’ get at my savings. No simple bank deposits for me - I was
going to beat the hell out of inflation by investing my savings profitably in the stock market.
In fact, I would beat the rate of inflation by a wide margin. I was too cool for my own good.
And with impeccable timing, I caught the concluding part of the great Harshad Mehta
orchestrated boom (caught in the Bulls’ tail!). But I caught the full impact of the
downdraught that followed the famous boom. The rest is history. Some more... My financial
situation or shall I say penury as a result of that debacle taught me some more lessons that
none of my English, Mathematics or Economics textbooks had. A new host of aphorisms
pored forth- No free Lunch, No pain-No gain...You see it is true that you must save for a
rainy day. But what follows, as a natural corollary is that to protect your savings against
inflation you must invest it in some asset that will earn you returns. Be they shares,
debentures, bonds, gold or even real estate. And therein lies the crux of the issue. All these
investment options have been associated with rags to riches as well as riches to rags stories.
So - Investing is a risky business. The higher the return you expect from your investment, the
higher the risk you will have to take. Your savings are not savings anymore. When you
decide to invest your savings you are crossing the Rubicon threshold. Your savings have now
taken the form of Risk Capital.

Risk capital? Yes, because that is what it is. Don’t panic at the thought. You could put your
money in a government bond or in a NSC and that would qualify as almost a zero risk
investment. (Actually it is just the lowest risk investment available to you, but that’s the topic
of another debate). And at the other end of the spectrum you have equities, which come with
a high degree of risk. So do Gold and real estate. But we’ll discuss that some other time. It’s
time to step back and spell out what I have learnt 1. Savings is the difference between Income
and Expenditure 2. You must save for a rainy day 3. Savings have no ‘form’ and must be
protected from Inflation 4. When you invest your savings it has morphed into Risk Capital 5.
Risk Capital can be eroded 6. Risk can be minimized by choosing to invest in low risk
investments

7. The risk associated with each investment changes with time, and must be monitored
carefully.

The take home from all of this is that the Rubicon must be crossed. And this is not a Catch22
situation. Yes you must invest to protect your savings from inflation but that need not
necessarily place your financial future at jeopardy. There are low risk investments that exist
in the market place. You can structure your investments based on your appetite for risk. By
the time you get to this point in the write-up, you may be feeling just a wee bit nervous about
your savings. Nay, Investments. Don’t. At the end of the day, investing your Savings is like
falling in love. It can be risky and it can hurt, but that doesn’t stop us from falling in love
does it? For the heady and glorious experience.... The old adage, “its better to have loved and
lost than never to have loved at all” may assume a new meaning. Investing can be a
rewarding experience just as being in love is.

Question:
1.Analyse the difference between investment and saving as per case study.
2. Your opinion about various efficient options of saving or investment in present situation.

Answer – 1
 Savings refers to the difference between income and expenditure.
 As per the case study the most basic difference between savings and investment is that
savings is the amount of money that is kept aside from a person’s earning for a rainy
day ( or for future contingencies) whereas the investment refers to as a ‘person’s
savings' that has been invested in stock market or the various securities available in
the market
 No doubt savings are a helpful weapon in times of emergencies but the enemy called
inflation hits really hard on the savings (considering time value of money) whereas
investments keeps getting multiplied which allows an individual to beat the inflation
by a broad margin .
 Investments must be done by proper planning of how much to invest , where to invest
and when to invest otherwise you may loose all of your savings.
 In order to protect the savings you must invest it in some assets that gives you
returns , the assets can be real estate , bonds ,shares or gold.
 The amount of return totally depends on the amount not risk you are willing to take as
the returns and risk associated with investment are directly proportional to each other ,
you may investment in securities that are risky in order to earn higher return whereas
investing in government securities would give you returns on zero risk basis.
 The risk associated with every security gets changed with time and can lead to
adversities if not monitored.

Answer 2
In my opinion there are n number of investment options available in the market that an
individual may go for in order to multiply his savings. The investment option to be selected is
a very personal choice and depends on the needs of the person of earning high or low also
managing the amount of risk that a person is willing to take . Broadly the investment can be
categorised as growth investment or a fixed interest investment , growth refers to making
more and more money by investing whereas fixes investment is getting regular interests and
is suitable for people who do not want to take risks for example old age people. Some
investment options are bonds , shares equity , debentures , gold , real estate , savings for
education , Mutual funds , bank products etc.