Wednesday, 18 July 2018

How & Where To Invest Your Annual Bonus


Appraisals are over in most of the companies in India. Several employees have been rewarded or will be rewarded with big fat bonuses for their individual & company's performance last year. while junior level execs earn bonuses of INR 100,000-300,000. the head honchos earn bonuses which runs into several crores.

But if you are a junior or mid level executive who has earned INR 100,000 as his/ her annual bonus, where should you invest it? How much do you splurge on shopping? How much do you spend on partying with friends? How much do you invest & where do you invest(assuming there are no medical/immediate expenses)?

Shopping/Partying

We would suggest you spend 3%- 4% of your bonus on dinner/partying with friends & family. Although you might be tempted to be more generous, we strongly advice you against it. One way to spend on your friends & not disappoint them by asking them to pay later on is set their expectations right. You can do it by informing them beforehand about your budget for the night & that they will have to chip in for the amount exceeding your budget. There is no shame in informing your friends that you are on a budget.

You can spend another 4%-5% of your bonus on shopping expenditures. We would suggest you opt for an EMI option or use money saved in your salary account to fund your electronic goods purchases which are beyond 5% of your bonus. You can invest 5% of your bonus in an ultra short term debt fund & withdraw it during Diwali, when retailers offer huge discounts on electronic goods.

Travelling

Millennials love to travel & post about their experiences. It would be prudent that one saves up for their trips/travels beforehand. We would suggest you invest 10%-20% of your annual bonus in a short term/ultra short term debt fund for your trips planned in the next 1-2 years.

Investments

Out of the money that is left, you can look at the following investment options based on your age & risk appetite

Stocks

Stocks are the best investment option, especially to park funds which you won't require in the next 3-4 years. We would recommend you to research stocks & invest in them directly instead of investing via mutual funds. If you do not want to spend time researching stocks, you can invest in mutual funds, but the returns will be much lower(click here to read about stock investing strategies). We would suggest you invest in ELSS, as it is a tax saving option.

The more you can invest in stocks the better it is for you. If you are single/newly married & without any major responsibilities or upcoming expenses we suggest you invest all your money left post splurging on friends, saving for travel on stocks. If you are in your late 40's or 50's we would suggest you invest 20%-30% of your money left in stocks. The ROI on stocks is much higher than any other asset class. The average return on stocks is in the range of 13%-20%.

Debt Funds

If you intend to buy real estate or have any other major expenditure in the next 1-3 years, you can invest in debt funds. We would recommend investing in debt funds instead of investing in fixed deposits as you do not have to pay tax on the interest earned. Although you are liable to pay long term capital gains tax when you redeem your debt fund units.

Debt funds can fetch you around 8%-9% returns Y-O-Y on your investments.

Stocks/ELSS + Debt fund should ideally be allotted 30%-60% of your investment monies off your bonus.

NPS

National Pension Scheme(NPS) is turning out to be the preferred investment option for the salaried class. One must note that the pension one may earn post retiring is taxable. But the benefits more than make up for it. Tier 1 gave returns of 11% last year. It is also a great tax saving instrument.

We would suggest you invest a big chunk ie approx 30% in NPS if you are in your 40's or 50's. For millennials, we would suggest investing 10% in NPS.

Provident Fund

Provident fund is a safe investment option which gives decent returns of 8%-9% Y-O-Y. People in 40's & 50's should invest 30%-40% of their bonus in provident fund.

Like NPS, PF is also a good tax saving option.

Gold

Gold is one of the most favoured asset or investment option for Indians. But owing to government regulations & other external factors, the return on gold has been dismal.

But experts insist that one must have gold in their portfolio. They say that one should be happy when the value of gold is going down, as people tend to invest in other investment options when economy is favourable. Whereas people divest from other investments & buy gold when the economic conditions are not favourable. Gold should constitute 5% of your overall portfolio.

You can also use your bonus to pay advance tax. This will help you reduce your tax outgo at the end of the financial year.

5 comments:

  1. Nice post Kartik.. Keep it up..
    I am also a personal finance blogger. check my site here: www.wealthpedia.in

    ReplyDelete
  2. It turns out that even the hottest port has a few places where you can get off the beaten path. Here are some recommendations that will make you feel like you're in the know 파워레인저 먹튀

    ReplyDelete
  3. First You got a great blog .I will be interested in more similar topics. i see you got really very useful topics, i will be always checking your blog thanks. รูเล็ต

    ReplyDelete
  4. I found your site perfect for me. It comprises of brilliant and valuable posts. I've perused huge numbers of them and furthermore got such a great amount from them. As far as I can tell, you do the genuinely amazing.Truly i'm intrigued out of this distribute 에스뱅크 주소

    ReplyDelete