5 Financially Smart Ways Of Using Your Diwali Bonus

Time to read: 4 mins | October 28, 2018

Diwali the festival of lights symbolises the victory of light over darkness; hope over despair; good over evil; and knowledge over ignorance.

During Diwali, amidst all the diyas, lanterns, fireworks, crackers, and revelry, the one thing common is a Diwali bonus. Bonuses bring joy and happiness; empower us and provide a better lifestyle and fulfil many of our short-term materialistic desires.

But if you take the opportunity to wisely utilise your Diwali bonus, it will serve in the interest of your long-term financial wellbeing  –– help you accomplish vital, larger financial goals of life, such as buying a dream home, children’s education needs, their wedding expenses, and your own retirement.

Here are 5 smart ways to deploy the bonus money:

1.       Invest in mutual funds – A productive investment avenue such as mutual funds can enable you to multiply your wealth and counter inflation. 

You see, investing in mutual funds carry the following benefits:

ü  Diversification (which is the essence of investing);

ü  Professionally managed by the fund manager and their investment team who have the expertise and wide experience in capital markets and investing

ü  Have a lower entry-level –– you can start investing as little as Rs 500 in mutual funds

ü  Facilitate liquidity

ü  Offer innovative plans (Direct Plan and Regular Plan) and services (SIP/STP/SWP) for you, the investor

A Direct Plan of a mutual fund (where you circumvent the services of a mutual fund distributor) in comparison to Regular Plan has a lower expense ratio. A lower expense ratio can potentially aid in generating extra returns in the long run.

And when markets are extremely volatile (as they are now), investing via a SIP (Systematic Investment Plan) is better than investing a lump sum, particularly when you are addressing financial goal.

Similarly, the Systematic Transfer Plan (STP) can help. Under STP, a lump sum amount previously invested in a fund can be transferred at regular intervals systematically in a piecemeal manner into another mutual scheme (as decided by you) of the same mutual fund house.

Remember that prudent investing is not about “timing the market”, but “time in the market”; as long as you have followed a systematic process-and-prudence-driven approach.

The Systematic Withdrawal Plan (SWP), as the name suggests, is well-intended when you need to withdraw funds systematically/regularly (say monthly, quarterly, half-yearly, and annually) and earn returns on the remaining investments over a period of time.

But to benefit from mutual funds in the wealth creation process what matters is the selection. Picking the right mutual fund schemes is extremely crucial. Hence, seeking expert opinion would be worthwhile.

2.       Invest in bank fixed deposits – If you are a risk-averse by nature, and wish to generate wealth securely and steadily, a bank fixed deposit (FD) is a worthy investment avenue. This apart, even from an asset allocation and diversification standpoint, it is sensible to hold some money in fixed deposits.

Here are a few benefits of investing in bank FDs:

ü  Worthy to plan short-term financial goals and contingency needs

ü  Thoughtful selection of plans/options (cumulative and non-cumulative, i.e. the ones that offer regular interest pay-outs viz. a quarterly payout or monthly payout) can help address your liquidity needs

ü  Earn a higher rate of interest of interest instead of keeping funds in a savings bank account

ü  Are worthy to plan for short-term financial goals and contingency needs

ü  A 5-year tax saver FD can even help you in tax saving

ü  A bank FD can be booked in a few minutes

ü  You can prematurely encash your bank FD or take a loan against the FD when you are in dire need of funds

Pay-off or reduce your debt burden – It would do well to your financial health to reduce the debt burden off your shoulders. By reducing debt you can save more and invest it wisely to improve the quality of life.

Hence, when you get a windfall income like a Diwali bonus, utilise it to prepay your loans – partially or in full. By doing this you will save on a lot of interest payments and improve your credit score. 

This is important because your credit score reflects your creditworthiness and credit behaviour. If your credit score is low, it limits your access to a loan when you need it the most. Therefore, maintain a healthy credit score of at least 750 and above at most times so that you get to access loans in future at the best rate.

3.       Boost your emergency fund – While being optimistic is a good thing, planning for a rainy day is equally important. Because, life often throws us nasty surprises when you least expect it and one needs to be ready to handle any contingent situation – be it the loss of job, a medical emergency in the family, or any other form of unexpected/contingent expenses.

So as a sensible move, deploy some portion of your Diwali bonus to build a contingency fund, also known as a rainy day fund. 

Ideally, you must maintain at least 6-24 months of living expenses, including EMIs as your emergency fund in a savings bank account or an overnight fund or a liquid fund. And it is necessary to keep reviewing the contingency fund regularly taking cognisance of the dynamic events in life even as you have an option to apply for a personal loan.

4.       Make an attempt to maximise – Benjamin Franklin, the founding father of the United States, who was a leading author, printer, political theorist, politician, Freemason, civic activist, statesman, and diplomat, aptly said, “In this world nothing can be said to be certain, except death and taxes.”

Hence, when you receive a windfall income such as Diwali bonus, do not ignore taxes. You must not ignore your constitutional duty of paying tax. Always ensure that you discharge this legal responsibility rightly and consider it a moral responsibility too.

Engage in prudent and holistic tax planning. Invest in tax-saving investment instruments such as Public Provident Fund (PPF), 5-Year tax saver bank FD, Senior Citizen Savings Scheme (SCSS), Equity Linked Saving Schemes (ELSS), pension funds, and insurance among others under Section 80C of the Income-Tax Act, 1961

Additionally, avail of other available deduction under the Income-Tax Act 1961 by opting for a housing loan, education loan, and opting for an health insurance to avail a deduction under Section 80D amongst a host of other provisions for tax planning.

Avoid procrastinating and resorting to sub-optimal utilisation of tax saving options. An efficient approach to tax planning will not only ensure long-term wealth creation, but it will also result in efficient use of capital. 

To sum-up…

This Diwali deploy your money wisely so that your dreams/financial goals can come true –– brighten up your financial future. Take the right steps and illuminate your long-term financial well-being.

Wish you a Very Happy Diwali

Happy Investing!

Happy Banking!

Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing. Axis bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.