Just got your variable pay? Don’t know how to use all that money? If you have a little time, that money could get you more money. #variablepay #personalfinance #investments #savings
Are you getting ready to receive a nice, big bonus sometime around now? In the last few days the business news has been all about IT giants Infosys and Tata Consultancy Services (TCS) offering great variable pay to their employees. While Infosys is said to be giving their employees variable pay of 95% for the December quarter, TCS has declared a variable pay of 100% for all its employees. It’s time for techies to splurge! But how many of us actually think about investing the bonus that we receive or using the extra money to close our loans? Just a handful of us. Don’t you agree?
That bonus money, if invested in the right places, could give you more money the next year around. It will be especially useful if there is no variable pay next year. In fact, you can invest your bonus in such a way that it generates an income for you. It’s possible! But before that, here are a few pointers to keep in mind when you receive your bonus.
- Close your debts – Before you decide to buy that latest smartwatch or gaming gadget, try and see if you can close any loans that you have. How do you gain? Here’s an example:
- Let’s suppose you took a four-year Personal Loan for Rs. 10 lakhs two years ago at an interest rate of 16%. If you use your Rs. 2 lakh bonus to prepay a part of your loan, you can save as much as Rs. 60,000 on interest.
- Invest before you spend – It’s your money and you have every right to spend it. But do it after allocating some to investments. You’ll feel pretty good when the returns on your investment come in in a year or two. For best results, every month when you get your salary – pay your EMIs, invest some money and then spend the rest as you see fit.
- Additional Reading: Why You Should Invest In Multi-Cap Funds
- Compare and contrast – Before you decide to invest, compare across investment avenues, note the differences and choose an investment that’s right for you. Whether it is Fixed Deposits or stocks, go online and check the features, rates and costs. This will help you get the maximum returns.
(The reason we started BankBazaar was because we knew that people wanted to compare across different financial products before deciding to make an investment or apply for a loan or Credit Card. We also know that getting all this information in one place and then trying to make a comparison isn’t an easy task. BankBazaar simplifies the process and lets you compare across different financial products. You can also easily make an investment or apply for a product online.)
If you’ve already received your variable pay and have decided to invest it, here are some investment avenues to choose from.
Deposits
Whether it is bank Fixed Deposits or corporate deposits, you can invest a lump sum and get interest income every month, quarter or year. While it’s advisable to invest only in highly-rated corporate deposits (read AAA), you can also opt for deposits from any of the commercial banks that offer good interest rates. Corporate deposits can get you returns that are about 1%-2% higher than those of bank deposits. And with inflation in India still at 4%, you can still get positive real returns from deposits.
Mutual Funds
Investing a lump sum in equity diversified funds is a good choice as long as you do your research on the Mutual Fund. Choose the dividend option to get regular pay-outs. Here are the points that you need to check:
- Performance – 3-year and 5-year returns should be better than those of peers.
- Cost – the expense ratio should be low (ideally less than 2%).
- Portfolio – the fund should invest in known names and reputed firms. The higher the number of such stocks, the better (this is especially important if you are not the risk-taking kind).
Additional Reading: Equity Investor? Don’t Follow The Herd!
There are Monthly Income Plans (MIP) offered by Mutual Funds. However, this might not be right time for MIPs as these are debt funds that may or may not invest in equities. With interest rates having fallen and hardly any rate cuts on the horizon, it is better not to consider MIPs at this point.
Stocks
You can, of course, park your entire bonus in one or many stocks. But note that the markets are on a high and parking all that money at one shot could mean putting that money at risk. If you are looking for some income, choose stocks with a good dividend history. Dividends can give you substantial income if you are investing a good amount of money in stocks. You need to do a fair bit of research here. Choose reputed names, check their financials (best to steer clear of loss-making/debt-ridden firms), check for consistent dividend history and ensure that the stock is not at its 52-week high.
As long as you have a plan in place, your money has a good chance of growing every year. Your invested money could even give you a bonus when the markets move up.
Hope this makes deciding what to do with your variable pay just a little bit easier!
This article was originally published on LinkedIn.