Make the most of your year end bonus – Ask us how?
Bonus is a bonanza for major salaried class in April/May. Yes, an unexpected huge sum of money in our bank account would make us take impulsive buying decisions. This blog is about on how to use the bonus amount in a prudent way to meet your future goal.
Get Rid of Debt
If you have any loans (other than home loans) such as personal loan, car loan, credit card balance etc., you should first try to clear it off; a debt-less life is more a stress-free life and makes us live happy. Hence use the bonus money to reduce your debt burden.
Don’t prepay home loan
This might be sounding contradicting to point 1., but there is a reason. At present the interest rates for home loan are hardly around 8.4% whereas when you invest in equity for long-term you would get at least 10% with positive compounding. Today even EPF offers 8.55% interest. Also in home loan you get tax exemption for both principal and interest which would get reduced if it’s prepaid. Hence we don’t recommend pre-paying home loan with bonus rather we prefer to stay invested mutual funds.
Do you have an emergency corpus that could be liquidated in case of emergency? If No, this could be a good starting point for you to start that. Emergency funds are funds that are typically used in highly emergency situation say a medical emergency or job loss of breadwinner etc. Ideally an emergency fund should be 6 months basic expenses including the EMI’s. You can park your emergency fund on an ultra-short-term debt fund to get better post-tax returns than your bank deposit. Read more about using emergency funds here.
We need to have long and short-term financial goals by forecasting future financial needs. Based on the investment horizon the asset allocation changes. However we have a mutual fund for every horizon that would give you better returns than any conventional investment options. The below table provide the asset allocation based on investment duration.
Also, when you invest in equity funds and feel market is high, put your bonus money in a liquid or ultra-short term fund and start a STP to reap the benefits of rupee cost averaging.
Let us use see a real-time use case. Rajesh got a bonus of 2 Lakhs on 8th April 2016 and wanted to invest for his child’s higher education which is 16 years away from now. So he used the below approach to invest his bonus money.
He first invested the money in liquid/ultra short-term debt funds and then made STP to equity funds.
The initial investment summary is depicted below
Now let us see the STP in each funds in detailed.
Kotak Low Duration Fund Direct Growth Plan -> Kotak Select Focus Direct Growth Plan
ABSL cash plus direct growth plan – > ABSL Pure Value Fund Direct Growth
L&T Liquid fund direct growth plan -> L&T India Value Fund Direct Growth
L&T Liquid fund direct growth plan -> L&T Emerging Business Fund Direct Growth
HDFC Cash Management Fund -> HDFC Balanced Fund Direct Growth
The current valuation of his portfolio is depicted below (As on 18th April’18)
The absolute returns of his portfolio stand at 42.15% with a CAGR of 19.23%
To choose the best fund in every category use our best in class Fund explorer
If you want a personalized asset allocation strategy (like Rajesh) to meet your financial goals, contact us today. We provide personal prudent asset management solution with manual and data analytic method.
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