In life, there are moments when we're blessed with a windfall—a sudden influx of cash, whether it's a bonus, a gift, or even through the maturity amount from insurance policies. It's a welcome surprise, but it often leaves us in a state of confusion. What should we do with this lump sum? The fear looms large that without proper planning, the money might slip away, lost in the shuffle of small, unnoticed expenses. This uncertainty leaves us pondering how to effectively manage this unexpected financial boon.
So, in this blog, I'm going to provide you with some ideas and options to navigate through this confusion and make the most of your financial windfall.
Option 1 : Fixed Deposit
The primary choice for many is to invest in Fixed Deposits (FDs). Let's break that down into two parts: non-cumulative and cumulative.
Non-cumulative - Some of us consider putting this money into an FD to earn income on a monthly, quarterly, or semi-annual basis. If this extra income significantly impacts your monthly budget—for instance, helping with rent or your children's school fees—it's a solid option. But if it doesn't change your monthly budget much, exploring other choices is wise. And remember, the interest earned is taxed based on your income bracket.
Cumulative - For those leaning towards conservative investing, aiming to safeguard their capital, and planning to use this amount for a different purpose within the next one or two years without letting it sit idle, this option might be suitable. However, it's essential to choose reliable and highly reputable banks or NBFCs for this kind of FD investment.
Option 2 : Loan Prepayment
Another option at your disposal is to use this windfall to prepay your loans. If your goal is to reduce your monthly instalment (EMI), opt to prepay loan with a shorter tenure and a higher interest rate. Let's take a scenario: you have a home loan of ₹60,00,000 for 25 years at an interest rate of 9%. Assuming you've paid the EMI for 36 months. Additionally, you have a personal loan of ₹10,00,000 for 5 years at an interest rate of 13%, and you've paid the EMI for 12 months. The home loan EMI stands at ₹50,000, and the personal loan EMI is ₹22,700.
Now, imagine you've received a ₹2,00,000 bonus. If you use this amount to make a prepayment on the home loan, your EMI will drop by around ₹48,500 (Approx), resulting in a reduction of ₹1,500. On the other hand, if you choose to prepay the personal loan, your EMI will decrease by ₹17,000, nearly a ₹5,700 reduction in the EMI amount. Therefore, always consider making prepayments on loans with shorter tenures and higher interest rates.
If your intention is to shorten the loan tenure, don't lower your EMI. Instead, continue paying the existing EMI after making the prepayment, and the tenure will automatically decrease. Before making any decisions, it's advisable to do some calculations. Many tools are available online; just search for "Amortization table" on Google, and you'll find numerous Excel files.
Now, if you only have a housing loan and no other debts, my personal suggestion is to consider investing that money in stocks or equity mutual funds. This strategy can help create wealth because making small prepayments on long-term loans may not significantly impact EMI reduction or tenure reduction
However, if your windfall amount is substantial, perhaps around 20-30% of your outstanding housing loan amount, then proceeding with a prepayment could be a wise move. If the idea of a housing loan prepayment brings you peace of mind, go ahead and do it. Don't get too caught up in the calculations of returns and opportunity loss.
Remember, life is about 80% psychology and 20% maths, so prioritize your peace of mind.
Option 3 : Exploring Stocks
Now, another interesting option is to venture into the stock market. If you have the time, knowledge, and confidence in your stock market skills, it's worth giving it a shot. However, a word of caution—please resist the temptation to entrust your money to friends or self-proclaimed stock market experts. Some may try to persuade you with flashy profit screens and grand promises. Don't fall for it. If you are well-versed in the stock market, possess the patience and skills, then consider investing your money directly in stocks. If not, it might be best to steer clear of this path.
Additionally, if you are highly interested in the stock market and are a beginner, a good approach is to put your money into a cumulative Fixed Deposit for one or two years. In the meanwhile, take the opportunity to learn about the stock market by reading books or attending classes. Once you have gained a better understanding, consider investing your money directly in stocks.
Option 4 : Equity Mutual Funds
Now, if you have the desire to invest in the stock market but find yourself short on time or lack the necessary knowledge, the best alternative is to consider investing in equity mutual funds. These funds are regulated by the Securities and Exchange Board of India (SEBI) and are professionally managed by qualified and professional fund managers. These experts are closely monitored by SEBI to ensure transparency and adherence to regulatory standards.
Equity mutual funds essentially pool money from various investors to invest in a diversified portfolio of stocks. The idea is to leverage the expertise of fund managers who make strategic investment decisions to generate returns for the investors.
In the image below, I'll present the category average returns of the past 10 years for equity mutual funds, offering you insights into the potential of the Indian market. However, it's crucial to understand that past returns are not indicative of future performance. They serve as a reference point to comprehend the market's potential
Category (As of 10/12/23) | Avg Rtn (%) |
Equity: Contra | 17.91 |
Equity: Dividend Yield | 15.65 |
Equity: ELSS | 16.28 |
Equity: Flexi Cap | 16.24 |
Equity: Focused | 15.98 |
Equity: Large and Mid Cap | 17.13 |
Equity: Large Cap | 14.09 |
Equity: Mid Cap | 20.26 |
Equity: Multi Cap | 18.06 |
Equity: Sectoral-Banking and Financial Services | 15.47 |
Equity: Sectoral-FMCG | 14.92 |
Equity: Sectoral-Infrastructure | 17.99 |
Equity: Sectoral-Pharma and Healthcare | 15.08 |
Equity: Sectoral-Technology | 18.08 |
Equity: Small Cap | 22.4 |
Equity: Thematic-Consumption | 16.67 |
Equity: Thematic-Energy | 19.11 |
Equity: Thematic-ESG | 14.71 |
Equity: Thematic-International | 8.47 |
Equity: Thematic-MNC | 15.57 |
Equity: Thematic-Others | 16.49 |
Equity: Thematic-PSU | 14.97 |
Equity: Thematic-Quantitative | 14.01 |
Equity: Value | 18.13 |
Disclaimer : We have gathered all the data, information, statistics from the sources believed to be highly reliable and true. All necessary precautions have been taken to avoid any error, lapse or insufficiency; however, no representations or warranties are made (express or implied) as to the reliability, accuracy or completeness of such information. We cannot be held liable for any loss arising directly or indirectly from the use of, or any action taken in on, any information appearing herein. The user is advised to verify the contents of the report independently.
Asset Allocation : Diversifying Your Investments
Now, aside from these options, we also have bonds and gold as alternative investment choices. However, let me emphasize a personal suggestion—avoid putting all your money into a single investment option. Instead, opt for a strategy known as asset allocation, where you diversify your investments across different asset classes
The key here is not to concentrate all your funds into one type of investment. Diversification helps manage risk and optimize returns. If you're interested in exploring this further, I've written a detailed blog on asset allocation. Please take some time to go through it; I'll provide the link below. It offers insights into the importance of spreading your investments across various asset classes to achieve a balanced and well-rounded investment portfolio.
Asset Allocation Blog : Seeds of Wisdom: A Tale of Diversification and Asset Allocation (gsminvestservices.blog)
Conclusion: Wise Investments Ahead
That concludes my discussion on managing windfall amounts and making informed investment decisions. I appreciate your time and attention in reading through these insights. I hope this blog has provided you with valuable ideas and considerations for handling unexpected lump sums, whether through bonuses, gifts, or other means. Wishing you financial success and wise investments ahead. Thank you!
Important Note: Seek Professional Advice
It's important to note that the content is crafted from my personal experience and perspective. It does not constitute financial advice but rather reflects my own ideas and views on the discussed topics.
Before making any substantial investment decisions, I strongly urge you to seek guidance from a qualified financial advisor or other registered financial experts. Their professional insights can provide tailored advice, considering your unique financial circumstances and goals.
Please be aware that individual financial situations vary, and consulting with a financial professional is a prudent step to ensure well-informed decision-making."
Disclaimer: Mutual Fund Investments
Mutual Fund investments are subject to market risk. Please read the scheme-related documents carefully before making any investment decisions. Past performance doesn't guarantee future returns.
Regards
Vishal Muralidharan.,CFP®
Certified Financial Planner®
Mutual Fund Research Analyst & Marketing Executive
GSM Investment Services – ARN 174939
Attributes: Images in this article are provided by www.storyset.com. Thank you to Storyset for allowing me to use their images.
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