Managing Windfall Carefully In The Days Of Market Optimism

Hemant Rustagi
Chief Executive Officer, Wiseinvest Advisors 

While receiving a lump sum of money as bonus brings cheer to the working class, it often causes dilemma in their minds about where and how to invest/utilise it. This is also that time of the year when salaried employees get their annual increment. In such a situation, there can be a temptation to do things that one may have been longing to do for long like going on a vacation, buying something on a whim or starting home renovation that may cost much more than bonus received and hence putting one's finances in disarray. Of course, there are those who are very careful with their money and hence make this lump sum money a part of their overall investment process thereby either using it to repay expensive loans or allocate it towards some of their investment goals. If you have received lump sum  money recently and are wondering what to do with it, here are some do's and don'ts: 

Any lump sum money, if put to use properly, can make a difference to your finances in more than one way. Hence, it is important not to act in a hurry. The right way would be to invest it. straightaway in options like liquid or ultra-short funds of mutual funds and then consider all the best possible options carefully to make an informed decision.

It is a well known fact that these are  the most expansive loans and hence if you have any such outstanding,  repaying them has to be the top priority.  Once this is done, you will get an opportunity to put your finances  back on track and start investing to achieve different investment goals. Needless to say, it would require a  change in your spending habits to  ensure that such a situation does not arise again.

While repaying a part of any loan sounds like a good idea, it may not always be the case. For example, considering that are many investment opportunities with a potential to earn handsome returns over the next 7 to 10 years, it may not be a great idea to repay say a housing loan. Before making a decision, you must consider tax benefits on repayment of principal amount as well as interest payable. If you have taken a joint housing loan with your spouse, the impact can be huge. Another consideration has to be the number of years left for repayment of loan. Similarly, interest on education loan is eligible for tax benefit. Hence, unless there is a specific situation that may warrant repayment of such loans, it will be a good idea to invest this money judiciously.

 Creating an emergency fund is an important aspect of your investment process. However, at times one may not be able to do so due to paucity of funds. A windfall can be a good starting point to create an emergency fund that is sufficient enough to cover one's six months expenses. This could go a long way in ensuring that you continue your investment process un-interruptedly without disturbing a planned investment process.

If you have been following a goal-based investment process, it will be a great idea to allocate this lump sum amount towards those goals that have to be  given priority. Of course, you have  to be careful in terms of strategy to invest this amount. If money has to be invested in debt funds or an option like equity savings fund, you can go ahead and invest the entire amount at one go. However, if amount is assigned to long-term goals and has to be invested in balanced or equity funds, it may be a good idea to invest either thru STP rather than investing as a lump sum or a combination of both. Investing through STP also goes a long way in allowing you to redefine your risk profile and enhance exposure to equities in a carefully planned manner. In addition, a significant part of the increment must also be aligned to goals especially the ones that require a large corpus like children's education and retirement planning