People in India – especially in the northern part – generally get a bonus from their employers during the auspicious occasion of Diwali. The bonus may vary from a small to an expensive gift or from a little to large amount of cash given in hand or transferred to a bank account.
While any type of bonus brings happiness, receiving a large bonus may make you think how to utilise it after spending a part of it during Diwali.
If you let it lie in your bank account, you will have excellent liquidity, but it will earn small interest, which will also be taxable.
So, for earning a better return, you should invest it, provided you can spare the money for a longer time.
Following are some of the investment options:
Fixed Deposit
A fixed deposit or FD would generate higher return than the interest on savings bank account and you may invest the bonus amount in lump sum.
However, the rate of interest on FDs can hardly beat the prevailing rate of inflation, resulting in loss of purchasing power of capital invested over time – especially after paying tax on the interest earned.
If you want to withdraw money before completion of the FD term, you may get a lower interest. On the other hand, on staying invested for a longer term, you will face reinvestment risk as the rate of interest would vary and you may get a lower interest rate during renewal of the FD.
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Equity-Oriented Mutual Fund
An equity-oriented mutual fund (MF) or equity MF is a scheme where at least 65 per cent of investments are made in equities or equity-related investment options.
To get the benefit of equity investments, however, the first and foremost condition is that you should invest only that part of money in an equity MF scheme, which you can spare for a very long term.
Otherwise, if you invest the money needed in a short-notice in such a scheme, you will face immense market risks and may end up in losses, in case of emergency withdrawal at a low market.
While the diversification issue is taken care of through a professionally managed diversified MF portfolio, to reduce the equity risk further, you should avoid investing in equity MF in lump sum and take the SIP (systematic investment plan) route.
But if you keep the bonus money in a savings account and invest in equity MF through SIP gradually, you would end up spending most of it.
So, you have to take a detour through a debt-oriented MF scheme – by investing in a debt scheme – like an overnight fund or a liquid fund etc – in lump sum and then starting a systematic transfer plan (STP) from the debt fund to an equity fund. It will provide you the benefit of investing in a debt scheme, as well as the return of an equity scheme.
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“Whether it is a Diwali bonus or any other large amount of money, it is better to not treat it as a lump sum for the purpose of investing. You can consider parking a large sum of money in a liquid fund and setting up a systematic transfer plan into an equity scheme which gives you the benefit of rupee cost averaging in the equity fund, while your lump sum is still earning a steady return in the liquid fund,” said Praneet Battina, Investment Team, Fi Money.
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