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How to cash in on your bonus
Moneycontrol.com | June 11, 2007 10:53 IST
Getting a bonus calls for a celebration. With the right investment tools, you can put your bonus to good use and create wealth.
Finance experts, Krishanmurthi Vijyan, CEO, JP Morgan Asset management; Rajivdeep Bajaj, MD Bajaj Capital; and Akhilesh Tilotia, financial advisor, tip you off.
How should you invest your bonus?
Krishanmurthi Vijyan: Calculate tax on the bonus. Most companies give their employees bonus only after deducting the income tax. If the net cost of debts is more than the cost of savings, you should pay off the debts first before you plan any savings. It is better to get rid of the high cost loans like personal loans and outstanding credit card bills.
Next is investment. While investing for one year, go for a mix of 80-90% in debt and 10-20% in equity. A long-term investment should have at least 70% in equity and 30% in debt.
As investors can't choose SIP to invest lump sum of bonus, you can certainly put the bonus in a debt fund first and then transfer it to equity fund through a Systematic Investment Plan (SIP).
If you are getting a quarterly bonus, make your investment on a quarterly basis through SIP. You minimise your risk through SIP. Those between 30 and 40 should increase their insurance cover. At this age, insurance is not very expensive. So it is important to invest your bonus money carefully.
Where should you invest your bonus?
Rajivdeep Bajaj: If I get a bonus of Rs 1 lakh (Rs 100,000), I will invest it in a tax savings scheme and exhaust the Rs 1 lakh limit of tax-free investment given under section 80C. Bonus money can be invested in insurance, post office schemes and mutual funds.
The best investment is ELSS from mutual fund. Of the total, I would invest Rs 50,000 in ELSS and the rest in a long-term ULIP for a period of 15-20 years.
As the companies give monthly or quarterly bonuses, there are a lot of investment options available in the market. If you are getting a monthly bonus, start a monthly SIP to invest in equity. If you are getting a quarterly bonus and you don't want to put it in equity, you can go for Fixed Maturity Plans (FMPs), which give 10% returns. You can also invest the bonus in a three-month FMP.
Should one treat the bonus as a part of your salary, as their tax treatment, is similar?
Akhilesh Tilotia: If I get Rs 1 lakh bonus, I will first think of saving the tax. I will also avoid investing the entire bonus in the market or in a risky savings instrument. It will be good to choose debt schemes and then slowly move the money to the market.
Don't spend the bonus; invest it. Generally, there is a tendency to spend the bonus. You can plan such investments much in advance.
It is, however, not necessary that you use the bonus to pay off your debts such as home loan. Home loan, even if you take it on 10% rate of interest, comes to 7-8% after calculating the tax break. But if it's a high cost debt such as credit card and personal loan, pay it.
Is it okay to prepay a loan with bonus money?
-- Sushrut Sardal
If you have taken a debt just because you are expecting a bonus, pay it off. But if you have taken a loan to create long-term asset, it is not necessary to review it upon getting a bonus.
My company gives me a bonus on a quarterly basis. How should I invest keeping in mind that I may have to leave the job before completing one year? I will have to return the bonus if I leave the company before it.
Bajaj: You could invest the quarterly bonus in a fixed income scheme with the return rate of 10%. Another option is liquid funds where return rate is 7-8%. Your return is assured in these instruments. I suggest you should not invest in share market. You can shift it to equity at the end of the year, if you stay on.
Is the bonus taxable? And if it is, how should I invest it?
-- Anya Joshi
Tilotia: The employer deducts the tax before passing it on to you. So the bonus you get is post-tax. You can also give the investment details of your bonus to your employer at the beginning of the year to a tax. Investment to the tune of Rs 1 lakh is tax-free.
If a person is not interested in using bonus to save tax, what should he/she do to maintain liquidity and also go about long-term investment?
I suggest a mix of 60% debt fund and 40% equity, if one wants to keep liquidity in the portfolio and have a moderate risk profile. Both mutual fund and diversified equity fund both are liquid funds, allowing you to withdraw money anytime.
Should one create a contingency fund?
Bajaj: Contingency fund is a must. You should keep three month's expenses as emergency fund. You may have to take a long break from work at any time. You can put it in liquid schemes, bank savings.
How much of bonus should be spent and investment?
-- Ankur Kohli
Bajaj: You should try to save the entire bonus, assuming that the bonus is 20-30% of your salary. But if you are getting more than this, make it a point to save at least 25-30% of it. If you are under debts, get out of it, as you have the opportunity to pay it off and put your financial planning on the right track. Maintain your savings target.
Tilotia: Try to save 30-50% of the bonus. But if you have maintained your savings rate, you can use 50-70% to upgrade your life style.
SBI [Get Quote] Mutual Fund has launched its first closed-end SBI Infrastructure fund this month. Sixty five per cent of the fund will be invested in infrastructure companies, and 35% in debt and money market schemes. The fund has a lock-in period of three years and a minimum investment of Rs 5,000. It offers both growth and dividend options. After maturity, the fund will become an open-end fund.
HDFC [Get Quote] Mid-Cap Opportunities Fund has been included in the closed-end equity scheme fund. Here 5 to 15% of the fund will be invested in equity and equity related securities of small cap companies and 70 to 95% in mid cap companies. The fund has a lock-in period of three years and a minimum investment of Rs 5,000. In debt and money market securities, investment can be up to 25%.
Source: Aapka Paisa
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