Best ways to use your bonus for different financial situations

If you are among the lucky ones who got a fat bonus this year, here is a road map to help you decide where to invest it. The suitability of the option depends on your time horizon, risk appetite and tax bracket.

If you have a high cost loan, here's what you should do:
• Settle credit card bills
• Pay off personal loan
• Prepay home loan

If you don't have a high cost loan, here's what you should do:

FOR 1-3 YEARS TIME HORIZON
• Invest in Short-term debt funds, FMPs, fixed deposits or arbitrage funds.

FOR 3-5 YEARS TIME HORIZON
Plan your investments according to risk appetite
Very low risk appetite (Loss is not acceptable)
• If your income is not taxable, invest in NSCs, fixed deposits, Sukanya.
• If your income is above the minimum tax slab of 5%, consider tax saving. Those who have exhausted the Section 80C limit can consider short-term debt funds, arbitrage funds. While those who haven't exhausted Section 80C limit, invest in tax-saving fixed deposits, NSCs, Sukanya Samriddhi Yojana.

For moderate risk appetite (5-10% drop in value is okay) • If your income is not taxable, invest in NSCs, MIPs, debt-oriented hybrid funds
• If your income is above the minimum tax slab of 5%; those who have exhausted the Section 80C limit can consider MIPs, debt-oriented hybrid funds. If you haven't exhausted Section 80C limit, consider investing in ELSS funds.

For investors with high risk appetite (Can sustain 10-20% loss) • Those having non-taxable income should invest in equity and balanced funds
• Those having income above the minimum tax slab of 5% and have not exhausted Section 80C limit, Invest in Equity and balanced funds. If you haven't exhausted Section 80C limit, consider investing in ELSS funds.

FOR OVER 5 YEARS TIME HORIZON
What is most important for you?
• If you are looking to earn high returns even if risk is high, invest in Stocks, mid-cap and multi-cap equity funds
• If you are looking to earn good returns but at moderate risk, invest in Large-cap, multicap equity funds, equity-oriented balanced funds
• If you want your returns to beat inflation, invest in MIPs, debt-oriented hybrid funds
• If you want safety of capital, invest in fixed deposits, NSCs, Sukanya Samriddhi Yojana.

POINTS TO REMEMBER
1. Your asset allocation: The investment decision must also take into account the overall asset allocation. If investing for the long term, go for equity only if your allocation allows you to take exposure to the volatile asset class.

2. Systematic investing: Investments in stocks and equity funds should not be done lump sum. Instead, put the money in a short-term debt fund and start systematic transfer plan to shift small amounts (Rs 5,000-6,000) to an equity fund every month.

3. Tax Deduction At Source: If interest income on a bank deposit exceeds Rs 10,000 a year, the bank will deduct 10.3% as TDS. However, if you have not mentioned your PAN, the TDS will be 20.6%. An incorrect PAN will also invite a penalty.

4. Recovering TDS: If your income is below the basic tax exemption, you can get back the TDS by filing your tax return. To avoid TDS, submit a declaration under Form 15G. Senior citizens should submit Form 15H.

5. Tax on gains: Long-term gains from equity and balanced funds are tax-free. Debt funds, including FMPs, are eligible for inflation indexation benefit if the holding period exceeds three years.