To paraphrase Robert Kiyosaki: ‘Let your money work for you.’

Sure. But what does this mean for those who are not so well-versed in financial matters?

After all, if it were so easy to grow one’s wealth, wouldn’t everyone have done it by now?

So, the question is: “Savings, trading, or investment — where to invest my money?”

No matter what your current age is or where you are in your life cycle, setting aside some money as “savings” in liquid instruments is essential, while the other two have more variables to consider.

And more variables equate to taking more risk.

But then, we have all heard of the adage: No risk, no gain. Playing it safe doesn’t always bear fruit — at least not if we want our money to work for us!

So, if you are still wondering where to invest money to grow wealth, whether there are less risky investments with competitive returns in India, or if trading or investing is even the right move for you at this juncture of your life, trust us when we say we can understand your sentiment.

That’s why, in this article, we have tried to delve into the three basic financial planning principles — Saving, Trading, and Investing — and discuss their upsides and downsides in light of the best investment options availablefor an average Indian keen on wealth creation and management.

Let’s Start from Scratch:

What Is Saving, Trading, And Investing?

Before we get into the nitty-gritty of these financial building blocks, let’s review the basics.

What is Savings?

You can set aside a certain portion of your income for a rainy day or for more significant short-term plans. It could be anything from a medical emergency to a downpayment for a new house or a vacation.

Now, if you choose to simply put ALL your money in savings accounts or fixed deposits (FDs) or rely entirely on PPF to secure your life after your retirement, you would probably end up with a very small fortune from the interest you would accrue for the money you managed to set aside over the years.

Obviously, there will not be sufficient financial gain from the money put aside in savings. But of course, it also means that there is relatively far less risk of losing money owing to the fluctuations in the stock market — as would be the case with trading and most investment plans.

What is Trading?

If you’re a high-risk, high-gain kind of person, and willing to put the necessary time and effort, trading could be a great option for wealth creation. Trading refers to buying and selling securities, such as stocks and bonds on stock exchanges like the BSE/NSE to take advantage of fluctuations in the market. Since trading involves high risk, it may result in higher returns or hefty losses. Also, in Trading, it is always recommended for investors to not time the market, take calculated risks that match risk appetite, balance long and short-term positions, plan for stop loss to minimize losses, and do proper research before investing in one or more instruments across companies. So, if your financial situation allows you to take on calculated risks,  this is a good wealth-creation choice for you.

What is Investing?

If you are someone who is willing to take a bit of risk and is patient with your vision set on the farther future, investing is the best middle path that offers the best of both worlds, enabling you to accumulate much greater financial gains over a relatively longer period and in a relatively safe way. One of the classic ways of investing could be via monthly SIPs on a portfolio of mutual funds (equity, debt, hybrid, alternatives) over long periods with annual adjustments on allocations done based on risk appetite, returns and life cycle factor. By investing in small amounts every month, the investor is averaging out day to day market fluctuations.

Note: The key difference between trading and investing lies primarily with the end goals whether it is short-term wealth creation leveraging market movements OR growing wealth for long-term needs.

Can You Get Rich Just by Saving a Lot?

Short Answer: NO.

While you do need to put aside a certain portion of your paycheck for future financial security into liquid short-term savings instruments, it is extremely challenging to get rich just by this approach.

As we have already explained, savings accounts or fixed deposits typically do not generate high returns because they are a so-called “safe” option, and their interest rates are usually minimal.

Note: There’s always a direct correlation between the level of financial risk you’re willing to take on and how much you profit from it.

Besides, you also need to account for inflation in order to ensure you’re not getting the shorter end of the stick with savings.

Let’s assume you have Rs. 100 in hand, and the inflation each year is 4%. In other words, the value of goods and services will also increase by 4%.

So, after one year, the purchasing power of Rs.100 will drop to Rs. 96, meaning that even if you have Rs. 100 in hand, you can only buy items worth Rs. 96.

Extrapolating this over, say, a five-year period, the “value” of Rs. 100 will drop to Rs. 81.

Thus, even if you do save Rs. 100, it won’t do much if the rate of return does not keep up with the inflation.

What Are the Advantages and Disadvantages of Trading?

Trading requires you to be proactive about which stocks/bonds to trade, and you also need to be wee informed to profit from the market’s volatility. Below are some risks and benefits in creating wealth through trading.

The Benefits Of Trading

• Quick Gains: Trading allows individuals to profit from short-term fluctuations, and those who understand the market dynamics well can make good returns in a much shorter time frame. 
• Flexibility & Liquidity: One of the biggest benefits of trading is that your money isn’t going to be tied up to specific investments once you choose them. You can make timely changes to your portfolio based on ‌current market conditions or exit if needed for any personal reasons.
• Diversification: You can spread out financial risk by diversifying your assets into stocks, bonds, commodities, derivatives, and whatnot! And if you know what you’re doing, this may help protect your portfolio in a volatile market.

The Problems Of Trading

• Transaction Costs: Short-term trading can have additional fees, such as brokerage fees or commissions, associated with them, meaning the total can add up every time you buy/sell equity.
• High Risk: Trading is NOT for the risk averse. Prices can quickly go up or down at any point in time. If you aren’t ready to cope with such an ever-changing market climate, you can lose out not only on the expected returns but also on the principal amount.
• Emotional Distress: Having to constantly navigate an evolving market also means trading can be an emotional rollercoaster for many people. Negative emotions like anxiety, panic, or greed that are quick to creep in may also impact one’s decision-making ability and affect how much they earn. 

Now, Let’s Talk About Investing…

If trading requires you to be highly active and manage securities often, then investing affords you the “luxury” of putting your money into specific assets and assessing how they perform over a longer period.

But what are the pros and cons of doing so?

What are the Upsides To Investing?

• Long-Term Convenience: You don’t need a huge amount of money to begin with. Besides, there is no right or wrong time to invest, so you can still maximise your returns without constantly monitoring the market every second.
• Income Generation: Some investments, such as dividend-paying stocks, can provide you with additional streams of income without much effort on your part.
• Reduces Risk: When you invest over a longer period of time, the volatility of the market no longer threatens your money in the same way as it does with trading. Historically, the stock market has constantly beaten the rate of inflation, which also ensures your money actually grows in value.
• Tax Benefits: Long-term investments typically come with some tax relief. So, no matter which tax slab you fall under, you can always avail yourself some tax-saving benefits as Long Term Capital Gains (LTCG) are taxed lower than Short Term Capital Gains (STCG).

What Are The Downsides To Investing?

• No Guaranteed Returns: While the correct investment strategies can be rewarding, there’s no such thing as a “guaranteed return” if you invest. Depending on the underlying investments, market volatility, and other economic factors, your investment portfolio performance would vary.
• Liquidity: Ideally, with most investment plans, you are required to park your money over a longer period of time to see any significant gains. And that means you need patience and perseverance. You can’t expect quick returns and can’t afford to get perturbed by fluctuations in the market. The further you invest and allow your money to grow beyond your lock-in period, the higher your long-term financial gains. A good investor must be able to ebb over stormy seas and see the bigger picture.

Choose The Right Strategy To Ensure Your Financial Success!

Saving, trading, and investing are different concepts — all of which have a lot to offer. Whether or not each aligns with your future financial goals depends entirely on how you choose to utilise them.

While saving is an obvious necessity, investing and trading are choices that will define how well you make your money “work for you”.

Investing offers a good opportunity to earn relatively stable long term financial growth (of course, with some risks), and hence recommended for everyone to incorporate it in their financial wealth growth plan.

Trading however can be an option you can take on ONLY if you can afford to set aside some money with your eyes wide open to the fact that you could quite easily win big or lose big, as well. Naturally, trading is also more volatile and risky choice compared to investing. But the gains can also be substantially higher if you can manage to make the right decisions at the right time (that’s possible with some trading knowledge under your belt).

Note: Never take these decisions lightly. Weigh all your options carefully and select options that are best suited for your current age, future wealth creation plans, and your risk appetite.

You may even consider talking to a professional for a better, in-depth understanding of where to invest money to get good returns.

If you’re looking for more interesting investment updates, stay tuned for our upcoming blog.