The bonus bounty: Play your cards right

MUMBAI: It’s that time of the year when your salary is supposed to look fatter — after all, the financial year has ended. And the New Year brings cheer with pay hikes and lumpsum performance bonus, if any. Are you one of those lucky employees to boast of such a windfall? If yes, ET congratulates you as it takes you through a financial plan to park your bonus money.

It’s better that you pay off your ‘bad and ugly loans’ with it. These could be your high interest-paying credit card bills, personal loans or car loan. “Any loan that costs above 14% should be paid off,” says Kartik Jhaveri, a certified financial planner, and director, Transcend India.

Never miss the wood for the trees and ensure that any investment is directed towards the ultimate financial goal, experts say. The idea is that you should see your money grow to meet your financial targets.

If you want to use the money for medium-term needs, say 3-4 years, consider safe instruments like debt. This could be debt funds or even arbitrage funds. Arbitrage funds generate fixed income by taking advantage of price differentials between the cash and the futures market.

“I would advise not to invest this bonus in aggressive instruments as this windfall is not part of regular investment plan. It’s better to park it in safe instruments, which can later be used for downpayment of home loan. This would lower the overall loan amount,” says Swapnil Pawar, director, Park Financial Advisors, a personal financial planning company.

If you are above 35 years old, you could also look at adding this amount to your retirement corpus. Consider index funds or balanced funds, Mr Pawar suggests. If you have smaller amounts like Rs 50,000 or below, you could look at PPF. That would shore up your long-term savings.

When you think long term, experts suggest equity. The reason being equity investments can give tremendous returns in the long term. This may be a good time to buy stocks, given that markets are looking choppy. But the bigger question is whether you want to enter the equity route via stocks or look at equity mutual funds? “You should look at splitting your money over 5-6 blue chip companies. If you don’t have the expertise, then a diversified equity fund will be a safe bet,” Mr Jhaveri adds.

Consider parking the money in liquid funds, fixed deposits if you require money in the near term. Liquid funds can be a good alternative as the effective tax rate would be less.

Every windfall comes with a price tag. In this case, the bonus amount will be taxed as part of your salary. How much it would exactly cost you would depend upon the tax slab. You could look at insurance, PPF or even equity-linked saving scheme, which would come under Section 80C. Even home loan could help.

The overall tax deduction on the interest component for a single borrower is Rs 1,50,000 and Rs 3 lakh in case of joint loans. Even the principal component of the loan enjoys tax rebate. So, base your decision on the post-tax return, not to mention your liquidity needs.

Source: Economic Times/15 May,2008