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Franklin Templeton Mutual Fund & PersonalFN have partnered together in this Investor Education and Awareness Initiative.

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Session 1: Are You Saving OR Are You Investing

We are glad to have you with us for our First Session - Are You Saving OR Are You Investing?

Alright so now let's get started.

Many people often misconstrue savings with investments. But let us tell you that there is indeed a difference between the two.

Merely putting aside money under the mattress, or in a vault, bank locker or savings bank account after meeting your expenses and liabilities may not mean that money works for you.

In times where the inflation bug is eating into your earnings, you need to move a step forward and invest. More importantly, invest wisely!

By now many of you may have realized that there is indeed a difference between saving and investing. So let's delve a little deeper and understand the difference between the two...which can help us march forward in our journey of wealth creation.

  • An act of putting aside money after defraying expenses and liabilities (...therefore the unspent income results in savings)

  • Savings = Income - All expenses including obligations towards borrowed money

  • It's an act of economising

  • In Personal Finance parlance:

Savings refers to preservation of wealth for future use

The Right Approach to Increase Savings
  • Refrain from impulsive buying (...It is imperative to stick to your immediate priority. Have a list while you go out shopping and be rational while making the list.)

  • Make a monthly budget (...Ascertain your income... frame the budget in a way that allows you to save more.)

  • Economise on expenses (...try to avoid those expenses which aren't necessary)

  • Avoid excessive borrowing / credit (So while you may own and use a credit card, use it thoughtfully knowing your means - Remember: excessive credit can lead to a debt trap!)

  • Start saving at an early age ( always helps to plan for your future. Remember, you can always postpone your decision to buy your favourite gadget, but you should save for a rainy day.)

  • You may start small, but save regularly (....Remember, your every bit of savings can help you attain financial freedom)

Conclusive remark on savings:

Now that we have seen the right approach to savings, the question is, can saving alone help you achieve your life's goals? - Which could be: buying your dream home, your dream car, your children's education, their marriage, your retirement; amongst a host of other ones.

Think about it.

Do you know, over the years, the money that you have saved - kept aside in your vault, bank locker, savings account, or under the mattress - may lose value as the inflation bug eats into your savings if it is not allowed to grow at a decent pace? Therefore, in order for it to grow, you need to put your 'money saved' to productive use - and make money work for you!

And what should you do to make money work for you?

Well, the answer lies in INVESTING!

  • An act of laying out your 'money saved' for productive use with an expectation of earning return more than inflation to preserve purchasing power of money

  • A process of making your 'money saved' work for you (instead of simply stacking in your vault / bank locker or under the mattress)

Advantages of Investing
  • Can grow your savings

  • Helps your money work for you since it is put to productive use

  • Can help in countering inflation and maintain purchasing power of money (You see, as money tends to lose its value over time due to inflation - which eats into your hard earned savings - you can counter the inflation bug by investing and maintain the purchasing power of money for your future)

  • You can achieve your financial goals in life (...which could be...buying a dream home, a car, taking care of children's education needs, their marriage and your retirement amongst a host of others)

  • Helps wealth creation

  • Provides a sense of financial security

The Right Approach to Investing
  • Understand your own risk tolerance (...if volatility makes you nervous then risky investments such as stocks and equity mutual funds may not be the ones for you. You then might as well invest in fixed income instruments instead, such as fixed deposits, PPF, etc.)

  • Ascertain the risk involved while investing ( see, every asset class - equity, gold, debt and real estate - has risk associated with it and therefore it is necessary to know about the same before investing your hard earned money)

  • Know your investment objective (... It is important to know that there are various investment avenues which are meant to cater to respective investment objectives. So enough care should be taken while investing your hard earned money. Ideally each of your investments should match your investment objectives)

  • Consider your age (...this can help you have the right investment instruments appropriate for your age)

  • Consider the time period before you need money (...Remember: The longer you are away from the time you require your hard earned money, the more risk you can take, and hopefully even earn more by investing in risky asset classes.)

  • Do sufficient research (...It is vital not to get carried away by exuberance and / or what your friends and family say. Instead, undertake solid fundamental research on respective investments, and please do not get caught up in hype....understand how the product works)

  • Evaluate cost of investing (...Remember: gains can be easily eroded if you don't consider cost of investing and thus it is vital to keep an eye on terms and conditions associated with the investment avenue. Very often many indulge in trading in the stock market to make a quick buck without really understanding the associated costs they are paying for regular trading or churning)

  • Aim at investing in investment products that can help you earn more than inflation (...if your investments manage to outpace inflation, it will help you achieve your financial goals smartly and efficiently)

  • Recognise the tax implication (...this is important...after all, the objective is also to earn tax efficient returns. If you do not plan well, you may end up paying higher tax on your returns)

  • Always start early ( there are benefits of doing so. You can understand it well by taking a look at the following table and chart)

An Early Bird Gets A Bigger Pie

Let us take an example of 3 friends - Vijay, Ajay and Sanjay - All 3 had good jobs and wanted to retire at the age of 60. Vijay being the smarter of the lot, started planning for his retirement at the very initial stage, at 25, and invested Rs. 7,000 per month. Ajay realised the importance of planning for retirement once he was 30, while Sanjay could feel the guilt of being left out only when he was 35. See what they accumulated when they were on the verge of their retirement.

Particulars Vijay Ajay Sanjay
Present age (years) 25 30 35
Retirement age (years) 60 60 60
Investment tenure (years) 35 30 25
Monthly investment (Rs.) 7,000 7,000 7,000
Returns per annum 10% 10% 10%
Sum accumulated (Rs) 2,65,76,466 1,58,23,415 92,87,834
(Source: PersonalFN Research)
Disclaimer: The names and figures are fictitious and used for example purpose only.
Also, return per annum mentioned above is for illustration purpose only.

Not only this, they also noticed a wide deviation in the proportion of growth they saw on their invested corpus. While Vijay's money grew around 9 times, Ajay's money grew 6 times and Sanjay saw a growth of just 4 times

Growth in wealth of Vijay, Ajay and Sanjay.
(Source: PersonalFN Research)
Disclaimer: The names and figures are fictitious and used for example purpose only.

Points to Remember for You to Save & Invest Wisely!

(Finally, to wrap-up this session of learning, here are some points one must keep in mind, now that you may have recognised why investing is imperative once you have saved)

To Save
  • Do not splurge all what you earn...SAVE! (...Remember: It is important to economise on your expenses and save for a rainy day)

  • It is never too early to save ( fact, savings can help you feel financially secure and even sleep better at night)

  • Start small but maintain the regularity

While Investing
  • Do not rush with investing (...undertake thoughtful research by doing a holistic study)

  • Investing is a serious activity ( fact, it could be essentially boring, and not exciting)

  • Do not speculate (...while it can be a thrilling experience, it can be killing as well if the tide turns against you. So it is best not to fall for excitement and exuberance)

  • Never use contingency funds to invest (...Remember, they are put aside as part of your savings to meet your requirements on a rainy day)

  • Never invest from borrowed funds (...except in the case of investing in real estate or your own business; but again, while investing therein don't go beyond your means)

  • Know your investment product (...understand how it works and undertake research; recognise the risk-reward relationship the product offers)

  • Diversify (...Remember, this can help you reduce your risk to your overall portfolio if you diversify wisely)

Some Important Ratios to Track Your Personal Finance

Savings to Income Ratio = Total Annual Savings
Total Annual Income

This ratio simply tells you what part of your income you are saving annually. Higher the ratio, the better it is, as it facilitates you to invest and lets your money work for you.

Total investment to Income Ratio = Current Value of Total Investments
Total Annual Income

This ratio helps you understand the current value of investments done as a ratio of current income.

At a younger age this ratio tends to be lower. However with time one needs to accumulate enough savings and invest to fulfil various financial goals in life.

Debt to Income Ratio = Total Debt
Total Annual Income

This ratio would help you evaluate the proportion of total debt as against the total annual income you earn.

Lower the ratio, the better it is.

Following these ratios, which you have just learned of, can help you keep a track of your finances.

So to end our today's learning exercise we now invite you to test your learning by taking up this simple quiz (and win exciting prizes!)

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Disclaimer: The contents of this document are only for informative purposes and are not to be used or considered to be an offer to sell or buy units of Franklin Templeton Mutual Fund schemes. This video is for information purposes only, provided on an 'as is' basis. Nothing in it should be construed as personal financial advice. You are responsible for your own investment decisions and you should seek advice concerning suitability from your investment adviser regarding any of the investments mentioned. The video is for personal non-commercial use only and may not be copied, stored, redistributed or broadcast in any way. We recommend you read the complete Terms of Use.

Mutual Fund Investments Are Subject To Market Risks, Read All Scheme Related Documents Carefully.

The Retirement Planning Guide

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