Financially Smart Ways Of Using Your Diwali Bonus
Come Diwali and most of us think of ways to spend the bonus. Seasonal sales lure us into buying items we may not even need. We even go overboard on gold! It surely is the season to splurge. So why not budget the bonus in such a way that while enjoying the festivities, future gets secured as well. In this article, we look at the top 3 ways that investors can utilize their annual handout.
Ways to use Diwali bonus wisely
For representation purpose only
Start STP - Systematic Transfer Plan
Investors who have a larger residual amount to invest but do not want to take the risk of timing the market can alternatively invest through
systematic transfer plans (STPs). This mode of investment allows investors to systematically transfer an amount of money from one scheme (source fund) to another (target fund) within a fund house depending on the terms and condition of the various mutual fund schemes. Investors can park the bonus money in a debt fund, preferably a liquid fund as it falls in the lowest risk bracket within the debt fund universe. Liquid funds1 have returned 7%, on average, in a one-year rolling return period since March 31, 2000, till September 30, 2019, compared with just ~3.5%-4%2 for most savings bank accounts. After investing money in the liquid fund, investors can do STP from this fund to an equity fund based on their risk-return profile and investment time horizon.
STP enables investors to rebalance their portfolio (smooth transition from debt to equity) by giving a one-time instruction to the fund house. Systematically investing in an equity fund helps mitigate the risks associated with equity market volatility. While opting for STP, keep a note of cost, i.e. the applicable exit load, in case of transfer from one fund to another. In addition, gains from a liquid fund or other debt fund are subjected to short-term capital gains tax (STCG).
1Based on an equal weighted index created out of CRISIL-ranked liquid funds
2 https://rbi.org.in/Scripts/PublicationsView.aspx?id=18532.Past performance may or may not be sustained in future.
For representation purpose only.
Invest in Gold ETF (paper gold)
Buying physical gold such as gold bars, coins or jewellery during Diwali is regarded very auspicious as it is considered to bring in good fortune and prosperity. However, investing in physical gold does have some disadvantages such as impurity, theft and unfavourable prices. Instead, investors can use a portion of their bonus to buy paper gold, as it provides greater price transparency, purity and negates the risks of storage and theft.
Gold exchange-traded funds (ETF) is a good option. These are passively managed mutual funds that invest in standard gold bullion (99.5% purity). Investors can get units of
gold ETF that are listed and traded on a stock exchange and, hence, can be bought and sold like stocks on a real-time basis. Gold ETFs are taxed as per non-equity funds. STCG for a holding period of less than three years is added to investors’ income and taxed as per the individual tax slabs, while the long-term capital gains (LTCG) tax is 20% post indexation after three years.
Build an emergency fund
Notwithstanding the plans to grow money, it is also important that individuals take this opportunity to plan for exigencies such as job loss, accident, etc. Investors can use the bonus money to create an emergency fund; usually it should cover up to 6 to 12 months of all the planned and unplanned expenses. An emergency or contingency fund can be built by putting some money in bank deposits (savings and fixed deposit) or in short-term maturity
debt funds such as liquid, ultra-short-term, overnight, money market, and low duration funds. These funds are generally less risky than other categories of funds and also score high on liquidity, which is the most important criteria while building a contingency fund.
Diwali comes once a year. Do enjoy yourself in the present, but be forward looking and prudently invest the bonus to safeguard your future. Before investing, do proper due diligence of all the avenues and invest as per the risk appetite. Seek professional help if needed.
Investors shall always refer to the Scheme Information Document and Key Information Memorandum of the schemes carefully to understand the investment objective, associated risk factors and other terms and conditions of the scheme before investing.
Disclaimer: Any comparison mentioned in this material is for general information only and not intended to be relied upon as investment advice and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Information and content herein have been provided by CRISIL Research, a Division of CRISIL Limited, and is to be read from an investment awareness and education perspective only. Recipient are advised to seek independent professional advice before making any investments. The views / content expressed herein do not constitute the opinions of SBI Mutual Fund or recommendation of any course of action to be followed by the reader. SBI Mutual Fund / SBI Funds Management Private Limited is not guaranteeing or promising or forecasting any returns. This material informative purpose only and it should not be construed as an investment advice to any party or promise on minimum returns and safeguard of capital.
In view of the individual nature of the tax consequences, each investor is advised to consult his/her own tax consultant with respect to specific tax implications arising out of their participation in investments. The tax rates are as per current tax laws and are subject to change.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.