Why You Should Invest Your Annual Bonus in Mutual Funds

Well, if you're fortunate enough to see a boost in your paycheque, whether it's through a bonus, raise, or promotion, it may be very tempting to spend this extra cash on a new electronic gadget or fun vacation, but using your bonus to achieve your envisioned financial goals may lead to greater happiness in the long-run. However, if handled well, the extra money can definitely boost one's personal finances.

Being rewarded a bonus is surely an achievement, but utilizing your bonus wisely, could be even better. If you have just received your bonus, don't just splurge it. Make a plan to use your bonus wisely rather than squandering it all. Curtailing on expenses may not sound appealing; however, investing some money regularly in mutual funds will surely offer significant returns in the long run.

Along with the joy of receiving the annual bonus, which we all look forward to, comes the worry about how to spend it wisely. While most people would encourage you to preserve that money, your friends and co-workers may want you to join them on a trip. From the perspective of long-term goal planning, experts may advise you to invest in diversified equity schemes in mutual funds.

Investing, rather than simply saving the money in a savings account, is one of the best and most rewarding ways to grow your bonus. Although there is no one-size-fits-all approach to investing your bonus, it is critical for an individual to invest this money and receive a clear return on that investment.

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Investment in Equity Mutual Funds...

As you would be aware, inflation erodes your income every single day. Thus, it is imperative that you invest your new-found wealth in mutual funds that offer inflation-beating returns in order to meet your crucial financial goals. The annual bonus money may be used for investing in long-term instruments such as equity mutual funds. While investing a large bonus amount in mutual funds, you may use a Systematic Investment Plan (SIP) strategy.

SIPs help you to systematically invest in diversified equity schemes such as large-cap, mid-cap, small-cap, Flexi-cap, thematic, etc. Compounded growth is a significant benefit of investing in mutual funds via SIPs. This enhances the returns earned. Hence, investing in mutual funds with a long-term horizon not only mitigates market volatility and risk but also helps in maximising profits.

The Systematic Investment Plan (SIP) offers the benefit of compounding effect and assists you in wealth creation. You may also consider a systematic transfer plan (STP), where you first invest the amount in a liquid fund and then systematically transfer the plan amount into an equity fund. Your SIP/STP investments in the equity fund will cushion you against market volatility. This is a better way to utilise your bonus income and brighten your financial future.

Equity mutual funds have the potential to fetch you good returns in the long run and are ideal wealth creation instruments. It is never too late to start investing in mutual funds, at first you may not require a huge lump sum to begin investing. You can start with a small amount, as low as Rs 500, via SIP mode.

Mutual funds offer several categories and plans; you may choose the schemes as per your suitability and diversify your portfolio. However, be careful of where you are investing and refrain from getting caught in a hype, exuberance, or what your friends and relatives have to say.

Investors must have an understanding of what they want to achieve with their bonus money: would they be saving to build wealth, or is there a specific financial goal? You must also know what is your investment horizon. For example, is this investment driven by a short or long-term aim. It is also important to understand your risk preferences before choosing any mutual fund scheme to invest your bonus.

Markets are on a roll, and you must ensure your risk appetite and investment horizon before investing. A high-risk investment is likely to see swings in the market, which will work itself out over time; thus, it is better suited to invest in a long-term investment. If your goal is short-term financial reward, it makes more sense to stick with a conservative investment, where your money is less likely to be subject to market fluctuations.

Given that, don't rush to invest in a volatile market scenario; choosing worthy mutual fund schemes is extremely crucial to gaining optimal returns. Assess your risk profile, investment objectives, financial goals, and the time in hand to achieve those goals before you select the mutual fund schemes.

You may evaluate mutual fund schemes based on various quantitative parameters such as returns across market cycles, risk ratios, portfolio turnover, etc., and qualitative parameters such as portfolio characteristics, the credential of the fund management team, the overall efficiency of the mutual fund house in managing investors' hard-earned money.

Investment in Liquid Funds...

Considering the uncertainty of macroeconomic events, it's prudent to be prepared for the future, especially if you're in a good financial position to do so now. Start an emergency fund if you don't have one already, and build a corpus by investing periodically so that you can dip into these funds in times of crisis.

Having an emergency fund on hand can help you get through a financial setback and prevent accumulating excessive debt. A sustainable emergency fund should include enough money to cover at least 12-24 months of living expenditures, including loan EMIs, and should be conveniently available in an emergency. Investing in liquid funds through mutual funds rather than a separate savings account is a smart way to develop your emergency fund in a passive manner.

If you took a hit from some unexpected expenses in the last year or you haven't yet built an emergency fund, use your bonus money to ensure you build a safety net with a contingency fund. Set aside a portion of your bonus to start or grow your emergency fund. An associate emergency fund isn't designed to provide high returns; rather, it's a fund that helps you increase your risk tolerance. This may allow you to take more considerable risks with your investments.

You may consider investing in Liquid funds to accumulate your emergency fund in order to keep it handy and safe. Liquid funds are a category under mutual funds where withdrawal is easy and quick. For example, Liquid funds are such funds where investment is comparatively safe and gives you a better return as compared to the savings account.

Therefore, it is advisable to utilize your annual bonus income towards investment in mutual funds with a long-term approach. Investment in equity-oriented mutual funds will boost your wealth creation journey, whereas investment in liquid funds will provide liquidity and stability to your portfolio during various market phases.

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Warm Regards,
Mitali Dhoke
Jr. Research Analyst