Have a windfall, use it wisely

With the economy and stock market beginning to show signs of recovery, things have turned for the better for employees. Many companies, who had either slashed jobs or salaries, are beginning to recruit and reinstate salaries. In fact, some have even announced bonuses.

For instance, after a strong performance in the second quarter (June-September), Tata Consultancy Services (TCS) announced about paying 150 per cent of the quarterly component of the variable pay to its employees. Infosys announced an across-the-board salary hike and Google announced a bonus after it posted a better-than-expected results. Mahindra Satyam, too, reinstated variable pay for its employees. Many companies in other sectors have also rolled back salaries, either partly or fully.

This is in stark contrast to the uncertainty during the same time last year when job cuts and downward revision of salaries were order of the day. And companies were busy finding alternative ways to cut costs.

With sharp cuts in salaries, a lot of people found themselves in deep trouble. Especially, those who had huge debts such as home or personal loans.

With things beginning to look up, many of these debt-ridden people could heave a sigh of relief. With additional liquidity in their hands, they can set their house in order.

Of course, there would be a temptation to buy that ‘one gift’ that you have denied yourself or to your family during these tough times. But hold on. There are many other things that need your immediate attention.

Use this surplus to start retiring your high-interest yielding loans. If you can’t do so in one shot, at least start the process. That is, get rid of all your credit card bills or personal loans.

Also, many would have had to dip into their emergency kitty because they had less salary and more commitments. Make sure that you restore the amount that has been taken out.

For a first-time investor, building a contingency fund should be of prime importance. About six months of expenses should be kept aside in an emergency fund. Since safety and liquidity are the most important factors guiding this investment, the remaining surplus should preferably be put in short-term fixed deposits (FDs) and money market funds.

Similarly, many investors would have had to put on hold their systematic investment plans (SIPs). Try and make up for that loss. Govind Pathak, director, Acorn Investments, said, “A lumpsum due to bonuses should be used to put delayed investment schedule back on track.” If plans to buy a house were postponed due to strained finances, this surplus could be allocated towards down payment for the same. For ones, who have not started the investment process still, this could be a good starting point. And, start by building up an equity portfolio. The reason: for a period of five years or more, equity is more likely to give better returns than other instruments.

However, instead of direct investment in equities, look for diversified equity funds or even balanced funds that invest 60-65 per cent in equities and rest in debt.

Hemant Rustagi, CEO, Wiseinvest Advisors, said, “Even broad diversified funds investing mainly in large caps with 40-45 per cent exposure to mid and small-cap companies make for a good option.”

If you are not too confident about equities in the current volatile market situation, look at monthly income plans (MIPs) as they invest 80 per cent in equities and the rest in debt. The advantage is that such MIPs book profits and rebalance the portfolio on its own to limit equity exposure and, hence, risk.

“Investors with a horizon of less than one year should not go for equities or equity-based funds, as it is a high-risk instrument. Debt funds will help these investors get decent and steady returns and also provide protection against risk. Short-term debt funds, liquid-plus funds should be of help to these investors,” added Rustagi.

Of course, as usual there are many things to do. But fix your priorities carefully. And, at the end of it, give yourself a treat. You deserve it.