How to invest your bonus money wisely?

This is that time of the year for which we all have waited eagerly for so long. Time for appraisals and bonus payouts! But it is also time to control your excitement. Pause and think wisely about how you can grow your bonus money. Bonus is a great time to figure out financially where the gaps are and allocate them accordingly.

Given the volatile situation that we are in currently, it has become imperative for all to make wise investment decisions and not rush into things that are not priorities. In such circumstances, it is very important to prioritise life goals and make investments. So, there are four things that you must consider as soon as you hear the sweet little ping in your mobile phone.

Create an emergency fund

Always think first from your household point of view. Considering the fact that you are aware of your household expenses, it is always advisable to create an emergency fund ranging between 6-12 months. This amount, if put aside, can still earn you money.

Given the rates that we have now, one must park the money in FDs and withdraw it anytime a crisis comes calling. Professionals who are not with established corporations like startups should have a horizon of at least 12 months. We are witnessing a series of downsizing that is happening in the startup ecosystem and when there are financial issues there are employment issues.

Young professionals may take longer to get the right job back, or if you are a freelancer which is now a fast emerging economy. If something is disrupted then it may take a longer period for you to come back and hence, naturally for such professionals they could be more confident in keeping 12 month's expenses aside.

Get a health insurance cover

The second most important thing would be sorting out a health insurance cover. Usually, health insurance is a thing that you want to do but sometimes you are not able to do it because either your monthly salary doesn't leave enough or you think it's a good excuse.

It is now time to think about "How am I insured?" It is also a good tax savings tool as well. For metros, medical cover of Rs 5 lakh -7 lakh is not adequate. And my advice to salaried professionals is that a medical bill of Rs 5 lakh is not a worry for a certain set of people. But what if the expense goes up to Rs 30 lakh and above. If you are staying in a metro, taking a cover as high as Rs 1 core is advisable and it would not be expensive at all. Some health insurers offer policies with base health covers of Rs 5-10 lakh and top-up covers of Rs 90-95 lakh for very low premiums.

Try to prepay your home loan

If you have ticked off the top two boxes, the next piece of advice would be to pay off your home loan if you have one. Today, home loan rates are hovering around 9 per cent p.a. and it is very difficult to earn 8.5 per cent p.a. or 9 per cent p.a. from fixed income instruments today. So, a housing loan is something that you should be looking at prepaying today.

Existing home loan borrowers can also open home loan overdraft accounts offered by various lenders under brand names like home saver, home loan advantage, Maxgain, home loan interest saver, etc. In case the home loan overdraft account is not offered by their existing lenders, they can exercise home loan balance transfer to lenders offering the overdraft facility. Under this facility, a savings or current account with overdraft facility is opened and linked to the home loan account. The borrower can deposit his/her excess savings, derived from bonus or other sources, in the overdraft account and withdraw from it as per his requirements. The home loan interest costs for the borrower is calculated after deducting the amount deposited in the savings/current account from the outstanding home loan amount. This allows home loan borrowers to derive the benefit of making prepayments without sacrificing their liquidity.

Invest in equity mutual funds

Without doubt, investing in equity mutual funds is the best from a long term perspective. In mutual funds, I would personally look at Large cap Index Funds and Flexi cap Funds as these two are good categories. Index funds are low cost products, i.e. they have very low expense ratio, and they are riding on the India equity story which from a long term perspective should be good. I also prefer Flexi cap funds as these funds have the flexibility to invest across market caps, sectors or themes, without any regulatory restrictions, depending on the changing market conditions.

Open high-yield FDs

For somebody, who has surplus money for investment and has a long term horizon, equity mutual funds are a must. But for somebody on the opposite spectrum, who wants to buy a car, house or needs capital for education and wedding, in a horizon that is less than four years, I would not recommend a debt mutual fund. From this financial year, indexation benefits available to debt funds have been withdrawn while the long term capital gains booked from debt funds would be taxed as per the tax slab of the investor. These changes have brought in tax parity between debt funds and fixed deposits.

Moreover, the deposit rates are very attractive and the post-tax returns for FDs would be the same as debt funds minus the volatility associated with debt funds. Currently, most small finance banks and many private sector banks are offering FD yields of 7.5 per cent and above. These banks have been categorised as scheduled banks, which makes their depositors eligible for depositor insurance program, offered by DICGC, an RBI subsidiary. Thus, the tax parity, income certainty, capital protection and attractive interest rates make it a great time to get into fixed deposits for parking surpluses and investing for short term financial goals.

Investment is always appetite and risk driven. So to make the most of our bonus money manage a healthy balance of appetite and risk is needed. For a large section, the propensity is to splurge the bonus money, but for the wise section make this money work for you.

(The author is Co-Founder & CEO of Paisabazaar)