Ahead of the Curve provides you with analysis and insight into today's global financial markets. The latest news and views from global stock, bond, commodity and FOREX markets are discussed. Rajveer Rawlin received his MBA in finance from the Cardiff Metropolitan University, Wales, UK. He is an avid market watcher having followed capital markets in the US and India since 1993. His research interests includes areas of Capital Markets, Banking, Investment Analysis and Portfolio Management and has over 20 years of experience in the above areas covering the US and Indian Markets. He has several publications in the above areas. The views expressed here are his own and should not be construed as advice to buy or sell securities.

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Thursday, 20 July 2017

What to do with your Bonus?

The much anticipated day and time has arrived. You’ve worked very hard for it and finally you’ve got it. It’s your bonus and it’s reached your bank account. The big question is however what are you going to do with it? Spend it, keep it idle in the bank or invest it? Some very attractive options lie ahead for you and a discipline approach can yield very good returns. These include:

1) Paying of your debt - Debt either via credit cards or personal loans comes with a very high cost attached. Interest often accumulates and multiplies and can become quite burdensome over time. It would be quite prudent to retire such debt with a part of the bonus.

2) Generating Tax Savings – You can invest part of your bonus in avenues such as the Public provident fund, Life insurance premiums, Equity linked savings schemes (ELSS) etc that give you a tax benefit of Rs. 1.5 lakhs under 80C. In addition you are eligible to invest a further Rs. 50,000 under the National Pension Scheme for an additional tax benefit under 80CCD (1b).

3) Investing for your family – You can invest for your children long term under the Sukanya Samridhee scheme or for senior citizens under the senior citizens savings scheme. While these investments come under the purview of 80c they tend to deliver returns as high as 8.6% which tends to be higher than traditional schemes like the Public provident fund. Investing in a larger house also has some appeal.

4) Saving for Emergencies - Ideally you should have six months of your salary in the bank for any emergencies you may encounter such as medical emergencies or vehicle repairs. If you have not done this you could utilize your bonus towards your emergency corpus.

4)  Retirement Planning – A proper retirement plan is absolutely mandatory and you can accomplish this via Systematic Investment Plans (SIP's). SIP’s have become increasingly attractive vehicles to build wealth consistently over time. You can break up your bonus into smaller increments and invest regularly over the course of the year without worrying about the ups and downs in the market. Consider starting an SIP on an appropriate mutual fund if you haven’t already done so.

If you have exhausted all the above options there are still some more attractive options for you. You can tailor make an investment strategy to fit your life style and accomplish your life goals. The plan can be designed according to your risk appetite and tolerance and can help you build significant wealth over time. So why wait any longer? Look at your investment options and start creating your unique investment plan. This will help you spend your bonus wisely.

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Cash - 40%
Bonds - 20%
Fixed deposit - 20%
Gold - 5%
Stocks - 10% ( Majority of this in dividend funds)
Other Asset Classes - 5%

My belief is that stocks are relatively overvalued compared to bonds and attractive buying opportunities can come along after 1-2 years. In a deflationary scenario no asset class does well other than U.S bonds, the U.S dollar and the Japanese yen, so better to be safe than sorry with high quality government bonds and fixed deposits. Cash is the king always. Of course this varies with the person's age.