​

I congratulated her and asked her what she was going to do with the additional income. She said she hadn't decided yet, but she would probably keep it as a savings in her bank account. I suggested that she should consider investing her surplus income in mutual funds.

As she had already started investing in mutual funds based on my advice a year ago, she did not feel the need to invest her additional income in mutual funds. So I went on to elucidate how investing the surplus income in a mutual fund can build wealth and add to her financial well-being.

Would you like to know what I told her?

Read on...

Helps suit your needs

The best thing you can do with your surplus income is to invest it. The surplus income whether in the form of salary hike and/or bonus can be invested in a mutual fund scheme either as a lump sum amount or a Systematic Investment Plan (SIP). Whether the salary hike is below or above your expectations; any amount (little or large) can be invested in mutual funds. You can use it to start a new SIP or to step up your investment in the existing ones.

Benefits of diversification

With mutual funds, you can invest across different sectors, market capitalisation, investment styles, and time horizon. Thus, you can create a well-diversified portfolio which will enable you to minimise risk and maximise the returns.

[Read: Is Your Mutual Fund Portfolio Overcrowded?]

Meet your desired goals

Mutual fund helps you design your investment plan keeping in mind your various short-term and long-term goals. If you invest your surplus in mutual funds, you will be able to achieve your goal faster than the assumed time horizon. You can first utilise some of the surplus to meet your short-term goals and the rest, if any, can be invested towards long-term goals.

[Read: Is Your Mutual Fund Portfolio On Track To Accomplish Your Financial Goals?]

Enables you to counter inflation

Inflation affects your investments. Thus, while planning for future income such as retirement, take into account the returns adjusted for inflation. One way to counter inflation is to increase your investment every year. Stepping up your investment every year will give you a bigger corpus at the end of investment tenure vide the power of compounding, which can counter inflation.

If you do not step up your investments, the purchasing power of your money will be subsequently eroded and you will have a lower corpus to meet your goals.

Offers liquidity

Mutual funds provide high liquidity, which means that you can exit the fund whenever you want. The redemption amount will be available to you within a day. This is, however, not applicable to mutual fund schemes that have lock-in period.

How do you go about it?

You can invest in equity funds or debt funds or a combination or both depending on your goals, time horizon, and risk appetite. While equity funds are important for long-term wealth creation, debt funds offer stability to your portfolio. Make sure to create a portfolio that is well-diversified and is able to meet your financial requirements.

When you want to increase your investment every year in line with the increase in your income, do it by increasing your SIP by a certain fixed percentage or a fixed amount. This can either be in a new mutual fund scheme or an existing one. Your expenses may not necessarily increase after the extra income, which will allow you to make this additional investment.

[Read: How Stepping Up SIP Every Year Gives A Boost To Your Wealth]

If you have received surplus in the form of bonus, investing a lump sum amount along with your monthly SIP can help you achieve your financial goals faster.

For example - The cost of higher education at present is Rs 20 lakh. If you want to plan for your child's higher education which will be 10 years from now, you will need around Rs 51 lakh. To be able to achieve the goal, a monthly SIP of Rs 22,327 will be needed assuming an annual rate of return at 12%.

Year	Yearly SIP Contribution (Rs)	Value at the end of the year (Rs)
1	267,927	285,997
2	267,927	608,265
3	267,927	971,405
4	267,927	1,380,600
5	267,927	1,841,691
6	267,927	2,361,260
7	267,927	2,946,724
8	267,927	3,606,439
9	267,927	4,349,822
10	267,927	5,187,485

(Note: For illustration purpose only)

​Now along with SIP if you also invest your yearly bonus amount, let us see how the amount at the end of the tenure changes. Bonus amount of Rs.50,000 is assumed.

Year	Value of SIP at the end of year (Rs)	Value of bonus at the end of year (Rs)	Total value at the end of the year (Rs)
1	285,997	56,000	341,997
2	608,265	118,720	726,985
3	971,405	188,966	1,160,371
4	1,380,600	267,642	1,648,242
5	1,841,691	355,759	2,197,450
6	2,361,260	454,451	2,815,711
7	2,946,724	564,985	3,511,708
8	3,606,439	688,783	4,295,221
9	4,349,822	827,437	5,177,259
10	5,187,485	982,729	6,170,214

(Note: For illustration purpose only)

By investing a lump sum of Rs 50,000 every year, you will be able to reach the goal a year early. At the end of 10 years, the accumulated amount will reach Rs 61 lakh. Thus, by making an additional investment of Rs 5 lakh over a period of 10 years, you will have an additional corpus of Rs 10 lakh.

The bonus amount can also be parked in liquid funds and you can then opt for Systematic Transfer Plan (STP) to transfer money in equity funds regularly. Alternatively, you can park it for your contingency reserve.

Selecting the right funds is crucial to achieve the desired results. Select funds based on various quantitative and qualitative parameters. One should also follow discipline when holding an investment and not get affected by market sentiments.

My friend was convinced about the importance of stepping up her investments in mutual funds and decided to increase her contribution whenever she has surplus income in hand.

Hope you will be wise and do the same.

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Happy Investing!

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