5 Smart ways to invest your year end bonus Plan it now - Motilal Oswal
5 Smart ways to invest your year end bonus Plan it now - Motilal Oswal

5 Smart ways to invest your year end bonus - Plan it now

As the financial year approaches its end in March, the other big worry apart from your tax planning is the quantum of your year-end bonus. Most companies pay out fixed and performance-related bonuses around the beginning of the new financial year and that is the time you are likely to get a tidy sum in your hand. Of course, that is assuming that you have performed really well and have stretched yourself and your team well beyond the targets. But getting your bonus is only one part of the story. Most people tend to blow up their bonuses on shopping and travelling. While you are entitled to your share of fun, seriously look at your bonus money to contribute something useful towards your future.

 

So what is the best way to invest bonus money? The key is how to spend bonus wisely rather than just blowing it up in a few items of conspicuous consumption. What you need to understand is how to budget bonuses and more importantly how to invest year-end bonus. Life is not just about the future so you must have your share of fun. But this year use your bonus also to create something valuable for yourself in the long run. Here is how..

 

Pay off the sticky debt in your books

For the past many months you have been worrying about your rising credit card bills and your personal loan EMI. You are paying just 5% of your credit card outstanding under the revolving credit facility but that is only making matters worse for you. Use your bonus to pare down your credit card outstanding. You can also use part of your bonus to pre-pay your personal loan and you can also negotiate with your bank to waive closure charges and also reduce your EMI proportionately. Remember, when you close a credit card which costs you 3% per month, you are actually earning 37% per annum. You surely cannot think up a better way to use your year-end bonus. Let debt closure be your first priority

 

Use the lump-sum to create an STP into equity funds
If you are not too much into debt then your immediately priority will be to make some wealth creating investments out of your bonus. If you have a bonus of Rs.3 lakhs with you then you need not invest the entire money into equity funds. You can invest the amount in a debt fund or a liquid fund and then do a monthly systematic transfer plan (STP) that sweeps a fixed sum of say Rs.25,000 each month and invests in an equity fund. That way you hit two birds with one stone. On the one hand, the debt fund or the liquid fund will give you better returns than your savings account. Secondly, by doing an STP, you get the same benefits as an SIP; which means rupee cost averaging works in your favour and reduces your cost acquisition.

 

How about creating a portfolio of direct equities

By now you have surely heard the legendary story of how an investment of Rs.10,000 in Wipro in 1980 will be worth Rs.500 crore today. If that sounds far-fetched just look at the number of equity stocks that have multiplied 20-25 times in the last 5 years and you will find plenty of them. The year-end bonus is an opportunity for you to create a solid portfolio of direct equities. Of course, you need to consult your advisor and also talk to your broker before investing as you need to factor in issues like the industry life cycle, financial attractiveness, corporate governance standards, management quality, valuations etc. But if you are able to sit down and identify quality stocks with strong potential then you are likely to create solid wealth for yourself over the next 10 years. The bonus may be the right time to start off with your direct equity portfolio.

 

Boost your emergency funds

Use a part of your bonus to create or enhance your emergency fund. An emergency fund is not meant to give you great returns but it is a fund that improves your risk appetite. If you decide to leave your job or embark on your own business venture then you have the luxury of falling back upon your emergency fund. This will enable you to take on greater risks in your business and in your career. There is no hard and fast rule for the quantum of the emergency fund but you should ideally have 6 months of expenses covered. That is a good way to allocate part of your bonus money.

 

Allocate part of it to your retirement and your child’s future

You must be surely planning out your retirement and your child’s future through various investment schemes. The bonus is a good opportunity to boost your corpus creation. For example you may be targeting to create a corpus of Rs.20 lakhs for your child’s education 10 years from now. But if you add a booster from your bonus, then you can either have a higher corpus or even look at reducing your monthly allocation. These are things you need to focus on.

 

In most people, the urge to splurge their bonuses is quite strong. A better way out will be to make this money work for you. And actually make it work harder!
 

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