Tips on How Best to Invest Your Bonus

Tips on How Best to Invest Your Bonus

We all look forward eagerly to our annual bonus. But now that you have got your bonus, what will you do with it? You could go ahead and buy yourself or your family members gifts, or go on a vacation. Or you could save your bonus. Here are some tips on how best to invest your bonus.

There Things You Should Know About Investing Your Bonus

  1. Since a bonus is a one-time award, whose size depends on your and your company’s performance, it is best to invest it in short-term instruments such as liquid funds. A liquid fund is one type of mutual fund which invests primarily in money market instruments like certificates of deposit, treasury bills, commercial papers and term deposits, which have a maturity period of 90 days or less. The lower maturity period of these underlying assets is an advantage in two ways. Firstly, since these underlying assets are very short-term and not traded on the market, they are held to maturity; hence, there are usually no capital losses which might result by selling a security before maturity. Secondly, the lower maturity of the underlying assets allows most liquid funds to have no exit or entry loads. Thus, liquid funds can be easily withdrawn with no penalty.
  2. You could invest your bonus in a fixed deposit at the bank. However, liquid funds can give much better returns than fixed deposits, particularly in periods of high inflation and high interest rates. In fact, the post-tax return on liquid funds also tends to be more favourable as compared to the post-tax return on a fixed deposit. Thus, while the income earned on a fixed deposit is subjected to TDS, the same is not true for a liquid fund. In addition, if you hold the liquid fund for longer than a year, then it is subject to long-term capital gains tax of 11.33% without indexation or 22.66% with indexation, while the income earned on your fixed deposit is subject to the same tax rate as your tax slab. Thus, you can benefit from a liquid fund if you are in a higher tax bracket than the 10% slab and have an investment horizon of longer than a year.
  3. It is best not to invest your bonus in a mutual fund which has the objective of long-term capital gains. A one-time investment in such mutual funds is less beneficial than investing in the form of a systematic investment plan, where you invest a fixed sum every month and stay invested for the long-term.

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