Savings and Investment Essays - Finance, Money, Economy, Investment

Savings is the putting aside funds and a vehicle which returns the principal at some future point, and in the meantime delivers a rate of return in the form of interest. The principal does not gain any value, other than the interest paid out, and at the maturity or decision to liquidate the savings asset, has the beginning principal value. These vehicles are known and income producing assets. In other words there is no ?growth? aspect of savings vehicles. Investment vehicles differ in that there is not only a chance for an income, but also capital gains as well (when the underlying value of an asset increases about its face or maturity value). This security is considered to contain more risk (the possible of loss in value) than a savings security, but it does contain the possibility of an unlimited potential gain from value appreciation (growth). The individual investor must make the determination whether the safety of a guarantee savings return outweighs the riskier potential for a large return with an investment vehicle. The investment vehicle can also fall in value; the value can actually fall all the way to zero and the investment becomes worthless. A typical investor will expect a much larger potential return for the gamble to pay off versus the lesser but more certain return of a savings vehicle. Even with investment vehicles it is possible to share the risk of the potential return of investment securities. One can purchase the investment vehicle of a particular company and the fate of that investment is tied to that company?s fate and financial performance. However, pooling funds from a number of different investors can spread the risk and allow for better cost savings upon security accumulation. This is the benefit of a mutual fund. A mutual fund is created to pool together sums of money from many investors to allow for economies of scale on purchasing and sharing both the risk and reward of investment securities. Investing in a mutual fund allows for a greater spreading of the risk than investing in one or a few stocks of different companies. Diversification reduces overall risk because not all individual choices will perform well or poorly at the same time. If one does not do well, the others can make up some or all of the loss.