by Dheer Kothari

Created on: June 09, 2009   Last Updated: August 12, 2009

Saving is a good habit. It is a priority with most of us who want to provide a cushion for rainy days. Your savings today will take care of your needs tomorrow. Depending on one's income one can set the level of savings at regular intervals. As you save, you defer your current consumption expenditure.

Allocation of assets is crucial to your cash flows. Your wealth grows when you curtail expenditure and allow your savings to grow. Budgeting is a useful tool which gives you an idea of your monthly recurring expenses and how much you can save comfortably. How much you save is entirely a personal choice.

Asset allocation again would differ from person to person depending on his/her risk profile and future plans- it could include buying a house or providing for higher education of children or their marriage. Depending on your cash needs in the short and longer term you can allocate resources in either fixed income instruments/bonds or shares.

For instance if you are not likely to need money for the next 10 years for your house purchase you can safely put your money in shares without having to worry about short term fluctuations because over a longer period you are likely to make above average returns. On the other hand, if you need money within the next two to three years to say ,finance your kid's admission to a premier business school, the right choice would be to go for fixed tenure bonds or bank fixed deposits, or even a fixed income mutual fund.

A large part of our savings goes into productive investment which in turn fuels economic growth at the macro level. The experience in India suggests that savings by the household sector has been steadily growing and has reached the level of 23 per cent of GDP. As a percentage of gross domestic savings, the household sector contributed roughly 74 per cent in the five years to 2006-7. See report.

You save either for the short term, medium term or long term. Short and medium term savings take care of your immediate requirement of funds like health care, education, buying property or simply meeting the needs of your family and children. Your long term savings take care of your retirement and the income stability for your dependants when you are either incapacitated and no longer earning a steady monthly income.

At the individual level, yours savings insures your future and if done judiciously, can take care of all your requirements, and leave enough to spare for leading a happy and tension-free life. However, this is not easy and if the risk-return expectations are not fine-tuned it can upset your applecart. It means investing in the right asset class which matches your return expectations. If you do not have the patience or the capacity to survive a prolonged bear market (it could last for 3-5 years) do not invest in equities. Play safe.

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