The month of May in India is when the coffers of many working professionals see a relatively large influx. Yes, it is the time when many employees receive their annual bonus. While that brings a smile on everyone’s face, whenever one receives a surplus in earnings one must endeavour to strike a balance between enjoying these funds and allocating it to achieve financial objectives.
Reassess your investment
Investments must always be aligned with your financial goals which are designed to incorporate your risk/return objectives. We all have a long-term view of where we would like to be and try to reach there comfortably. Use the bonus to contribute to that goal in small ways. It could be pre-paying an existing loan or making down payment for a property. Align your short-term goals to your long-term ones in such a way that they are in congruence always. Small steps right now could help you retire comfortably.
Invest a lump sum amount
Try allocating a lump sum amount to a long-term investment. If you are highly conservative in nature then you can consider investing in a debt fund. Debt funds invest in bonds, treasury bills and other fixed income securities. The rate of return is usually lower than the equity or balanced funds as their investments are in relatively lower-risk assets.
You can also consider investing in balanced funds which usually invest in both debt and equity assets and hence have a higher risk element than debt funds. The equity component of the balanced funds is designed to provide long-term growth while the debt component serves to cushion the volatility in equity. Pure equity funds, on the other hand, can potentially give higher returns with high risk and can be started with a small investment. Make your decision based on your risk appetite, age, existing financial obligations and your long term goals.
Start a Systematic Transfer Plan
Systematic Transfer Plan (STP) gives you an option to transfer investments from one fund to another over a period of time. STP also gives you the flexibility to change the strategy of your investments depending on how markets are performing. You could go for a fixed STP where you can take out money from one type of fund, for instance, a debt fund, and transfer into another type, i.e. a balanced or an equity fund, or choose a capital appreciation STP where only the capital appreciation from the invested fund can be transferred to another fund.
Start a Systematic Investment Plan
Usually, with bonus one may also receive an increment. Consider allocating your yearly increment to a Systematic Investment Plan (SIP). An SIP is a plan where an investor can invest a regular sum every month in a fund of his/her choices. It can help in rupee cost averaging and to take care of volatility due to various market cycles, as the investment is made over a period of time.
You could make an SIP for your child’s education, for your retirement or for your next vacation or for any other financial goals you may have. Over a period of time, the investment can grow because it is a fixed obligation; it acts as a mandatory form of investment from your total income. After investment, gift yourself something nice This may not be the smartest way to spend a bonus, but then you have earned it. If there is some gadget or a vacation you have been dreaming of, spend on it. Splurging post investment and restrict it to about 30% of the total bonus. In the long term, you will be glad that you spent smartly.
The writer, Karthikraj Lakshmanan is senior fund manager, equities, BNP Paribas Mutual Fund