Many public sector and private sector employees receive hefty bonuses during the festive season. While most would use their bonus proceeds or a major part of it for shopping and other festive indulgences, the surpluses left can be used for improving one’s financial health.
Here are some tips on using your festive bonus to brighten your financial future:
Prepay Home Loans, Other Floating Rate Loans
The rising interest rate regime and back-to-back increase in repo rates have led to a sharp increase in the interest rates of home loans or other floating rate loans. More rate increases can be expected till the inflation rate continues to exceed the upper target set for the RBI.
Hence, existing borrowers of floating rate loans, especially those having long residual tenures, can use their bonus proceeds to make loan prepayments. This would somewhat cushion them from the impact of rising interest rates. While making prepayments, borrowers should opt for the tenure reduction option as it leads to higher savings in interest cost than the EMI reduction option.
Existing home loan borrowers can also transfer their loans to other lenders at lower interest and then opt for the home loan saver/overdraft option. This option allows home loan borrowers to derive the benefit of making prepayments while maintaining their financial liquidity.
Invest In Fixed-Income Instruments For Achieving Short-Term Financial Goals
Short-term financial goals are usually referred to those having investment horizons of up to 3-5 years. As short-term investment horizons allow lesser time to recover the losses from market volatilities and corrections, if any, investors should always lay greater emphasis on capital preservation and income certainty for their short-term horizons than on yielding higher returns. Thus, employees can utilise their bonus proceeds to create an adequate corpus for achieving their short-term financial goals.
As a rising interest rate regime adversely impacts the returns of debt funds, employees can park their bonuses in fixed deposits yielding 7% p.a. & above. Ensure to open these fixed deposits with scheduled banks as their depositors are protected from bank failures through the deposit insurance program of DICGC, an RBI subsidiary. The depositor insurance program covers cumulative deposits (including savings, current, fixed and recurring accounts) of up to Rs 5 lakh of each depositor of each scheduled bank.
Employees should opt for shorter FD tenures, preferably between 1-2 years, and avoid the auto-renewal option. Doing so might allow them to renew their FDs at higher interest rates based on their financial goals and highest slab rates.
Invest In Equities For Achieving Long-Term Financial Goals
Equities as an asset class beat fixed income instruments and inflation by a wide margin over the long term. This makes equities one of the best suited asset classes for achieving long term financial goals. Thus, employees having adequate allocation for their short term financial goals can invest their bonus proceeds in equities to achieve their long term financial goals. Employees lacking expertise or time to invest directly in equities can invest in equity mutual funds to benefit from the growth prospects of equity investing.
Those having taxable income can invest in Equity Linked Savings Schemes (ELSS), popularly known as tax-saving mutual funds, which qualifies for tax deduction under Section 80C. ELSS also has the shortest lock-in period of three years among all investment options qualifying for Section 80C deduction. They should preferably route their equity fund investments through SIPs as this would save them from the dilemma of market timing and ensure rupee cost averaging during market dips or corrections.
Fix The Gaps In Your Insurance Cover
The primary utility of purchasing life insurance policies is to provide a replacement income for one’s dependents in case of his unfortunate demise. Ideally, the death benefit of one’s life insurance policy should equal at least 10–15 times of his annual income. Anything less than that means that one is under-insured. However, many people confuse insurance with investment and end up buying ULIPs, endowment policies or money back policies.
These insurance policies provide very little cover for their very high premium, which leads their buyers to remain underinsured. Thus, employees without adequate insurance cover can use a part of their festive bonus for purchasing term insurance plans during the auspicious period. These plans offer much larger life covers at a fraction of the premiums of other life insurance plans.
Employees should also ensure to buy adequate personal accident and health insurance policies to insure themselves from the financial risk arising from accident and hospitalisation/medical treatment, respectively.
(The author is senior director at Paisabazaar)
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