Diwali isn’t just a festival; it is often an emotion. During Diwali, bonuses and cash gifts are common. However, many times we may spend this bonus on celebrations, buying expensive items, or park it in a savings account, which offers fixed but low returns.
A Diwali bonus, if invested strategically, may potentially yield higher returns and help you work towards future. In this article, we will explore ways in which you can invest your Diwali bonus prudently.
Table of contents
Why treat your Diwali bonus differently
Your Diwali bonus is special. It is an “extra” sum of money, beyond your regular salary, and may be used in a variety of ways. You may invest it as a lumpsum amount in mutual funds to potentially build wealth for the future. That said, you do not have to invest the entire bonus. A balanced approach — using some for lifestyle expenses, putting some in stable avenues like bank deposits to create short-term funds, and investing some for potential long-term growth — may also be suitable.
Option 1: Asset allocation funds
One suitable way to potentially grow a Diwali bonus may be to invest it in an asset allocation fund. An asset allocation fund is a type of mutual fund that invests across various asset classes such as equities, debt instruments and commodities (often gold). As per SEBI’s classification, such funds are called hybrid funds. This approach can help balance risk by spreading your money across different types of investments.
The objective is to maintain the relative stability of your overall portfolio even when market conditions change. Since no single type of investment performs well all the time, diversifying across a mix of different assets may mitigate risk.
Option 2: Make tax-saving investments
What if your Diwali bonus could help you reduce tax liability? Here are some tax-saving investment schemes to consider:
Also Read: What are the benefits of investing in mutual funds?
ELSS mutual funds
Equity Linked Savings Scheme (ELSS) are equity-oriented mutual funds that help you save taxes under Section 80C of the Income Tax Act, 1961 (old regime), while also potentially growing your money over time. Investments of up to ₹1.5 lakh in specified schemes can be deducted from your taxable income under this section. ELSS schemes come with a 3-year lock-in period, which is relatively low compared to other tax-saving options in this section.
In the highest tax bracket, investing up to ₹1.5 lakh can provide tax savings of up to ₹46,800 (under the old regime).
Example is for illustrative purposes only and is applicable for the old regime only. It assumes a 30% slab rate plus 4% cess. It does not consider surcharge or other available deductions/exemptions under the Income Tax Act.
Here are some other tax benefits under the old regime of the Income Tax Act, 1961.
Life insurance
Premiums paid for life insurance policies eligible for tax deductions under Section 80C (subject to conditions).
Under 80CCD (1B) – National Pension System (NPS)
NPS is India’s pension plan that helps you prepare for retirement. Investors can claim an additional deduction of up to Rs. 50,000 for investments made under NPS. This is over and above the Rs. 1.5 lakh limit under Section 80C.
Under 80D – Health insurance
Health insurance secures you against large medical bills in case of emergencies. Premiums paid for health insurance, including policies for self, spouse, dependent children, and parents, are eligible for deduction under Section 80D and its sub-sections.
Note: This is not an exhaustive list. Tax laws are subject to change, and benefits may vary based on individual circumstances. For the full list of eligible deductions and applicable conditions, please refer to official government sources or consult a qualified tax advisor.
Option 3: Build or top up your emergency fund
While it may be tempting to invest your entire bonus into growth-oriented equity mutual funds, it may be prudent to use a part of it to build short-term savings or an emergency fund. An emergency fund can help you handle unexpected expenses like medical issues, repairs, etc, without derailing your financial plan.
The amount of emergency funds you may require depends on several factors, such as whether you are self-employed or salaried and the number of dependents you support.
Since an emergency fund should be available at short notice, options such as savings accounts and liquid funds may be suitable for allocating a portion of your Diwali bonus.
How these options may help your financial future
Balanced potential growth and risk control
Asset allocation funds offer exposure to growth-oriented assets such as equity and commodities while cushioning downside via debt exposures.
Tax efficiency
Using tax-saving instruments like ELSS may reduce your taxable income (under the old regime), leaving you with greater disposable income. Furthermore, for equity funds, long-term capital gains are taxed at a relatively lower rate compared to short-term capital gains.
Liquidity and protection
An emergency fund may help you deal with unforeseeable circumstances or urgent needs without liquidating your investments.
Things to keep in mind before investing your bonus
Here are a few advice to consider before investing your bonus:
- Set goals: Define short and long-term goals; it could be buying a home, retirement or children’s education.
- Assess risk: Understand your comfort with risk, as market returns can fluctuate.
- Diversify: Spread investments across assets such as stocks, bonds, real estate and commodities to mitigate risk.
- Check taxes: Different options and asset classes have different tax rules; you may also consult a financial adviser for guidance.
- Pick investments: Choose between stocks, mutual funds, ETFs or real estate by comparing return potential, fees, and risks.
- Review regularly: Monitor your portfolio and adjust at least once a year to stay on track.
Also Read: How To Choose a Mutual Fund For Financial Goal
Conclusion
Those who consider their Diwali bonus to be just like any other gift may be losing out on a potential opportunity to build wealth for the future. If invested suitably, a Diwali bonus may become a tool to potentially boost your financial health. By allocating some of it to investments and using the rest for leisure, you may strike a balance between indulgence and responsibility.
FAQs
What are asset allocation funds and why are they suitable for bonus investment?
Asset allocation funds invest in different asset classes such as equity, debt, and commodities like gold. The equity portion enables potential long-term wealth creation, while the debt portion may provide a cushion in times of volatility and mitigate risk. Together, they help create a diversified investment avenue that may balance risk and return potential.
Can I use my Diwali bonus to reduce tax under Section 80C of the Income Tax Act, 1961, and what are my options?
Yes, you may opt for ELSS mutual funds, Public Provident Fund, life insurance premiums, 5-year tax saving FDs, National Savings Certificate, National Pension Scheme etc.
What is an emergency fund and how much should I keep in it?
An emergency fund is a cash reserve maintained for unexpected and urgent needs like job loss, medical emergency, repair, etc. How much to keep depends on your personal circumstances.
Are liquid funds a good choice for emergency savings?
Yes, liquid mutual funds may be considered a suitable choice for emergency savings because they invest in short-term, relatively low-risk instruments such as treasury bills, commercial papers, and CDs with maturities up to 91 days.
Should I invest the whole bonus, or keep part of it for expenses?
It is usually advisable to opt for a balanced approach. You might consider keeping a part aside for immediate or near-term expenses and rest in an emergency fund, growth investment and tax-saving instruments.
What risks should I consider when investing a bonus?
Market risk and volatility are the major risks. Besides, inflation risk should also be considered.
When is the best time to invest a bonus — immediately, or wait for market conditions?
There’s no single ‘best’ time. It is generally said that time in the market may be more beneficial than timing the market – that is, staying invested for longer horizons may be more suitable than trying to find the ‘right’ entry point. A balanced approach could be to invest part of the bonus immediately (especially if you have long-term goals) and allocate the rest gradually through a Systematic Transfer Plan (STP) — by first parking the bonus in a liquid fund and then transferring it in parts into equity funds. This helps spread out entry points and may reduce timing risk.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.
The content herein has been prepared on the basis of publicly available information believed to be reliable. However, Bajaj Finserv Asset Management Ltd. does not guarantee the accuracy of such information, assure its completeness or warrant such information will not be changed. The tax information (if any) in this article is based on current laws and is subject to change. Please consult a tax professional or refer to the latest regulations for up-to-date information.
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