Author: Golchhaco

It’s the end of another financial year, and many of you will be receiving your annual performance bonus. Exciting time, isn’t it? I bet you’ve got fantastic plans of how to splurge it. I’ve got them too, with a little boring, but necessary checklist I thought I should share.

I hope that maybe it helps you too. Without further ado, here’s 7 bonus ideas you need in your life.

1. Pay off debt:Credit card bills, student loans, vehicle or home loans, you could have any of these. It might be a good idea to pay these bills and also set aside some money for any future loans you may be considering. This will minimise the principal amount you owe and you can save on hefty interest payments.
2. Add to your retirement fund:Your retirement may be a long way off, but no one tells you it’s one of the first goals you should start saving for. Why? Look at cost of living today. If you spend 30,000 a month today as living expenses, 20 years down the line assuming inflation is at 6%, you’ll be spending 1.72 lakhs a month. Start putting aside a little by little with a Systematic Investment Plan in mutual funds to build wealth for your retirement. You can also invest in NPS and PPF for relative safety. Use a retirement calculator to figure out how much your SIP amount should be.
3. Build an emergency fund:Life is unpredictable. So, isn’t it a smart move to be prepared? You may lose your job, or your company isn’t doing well and can’t pay salaries, or for some reason, there is little or no income. It’s ideal to have at least 6 months of expenses saved in an emergency fund. Do not touch this unless it truly is an emergency. Consider a liquid fund for this. Frivolous purchases are not emergencies and can be planned.
4. Invest for longer term, big ticket goals: You’ve got a lumpsum in hand, why blow it all up now? You may want to purchase a car in the future, make the down payment on a house, fund your child’s higher education, or even start a business. Whatever your goal may be, no matter how far, start setting aside funds today for it. You can even start a SIPin mutual funds. Time and compounding will work for you.
5. Get insurance: Ever considered who will take care of your family should anything happen to you? Get a term plan to secure your family financially in case you die. The earlier you get it, the lesser the premiums cost. Don’t delay this until next year.
6. Buy health cover for your family: Health is wealth, and when your bonus can help you secure your family’s health, why not? There could be a time when your employer’s health cover may not be enough to cover all expenses. Consider purchasing a family floater health plan.

Invest in yourself: An investment in yourself is the best investment. Take a course, learn a skill, join the gym, read! Meet people, socialise, and don’t forget to have fun. You’ve earned it.

Debt mutual funds are those that invest in fixed income instruments – such as corporate and government bonds, overnight securities, corporate debt securities, money market instruments etc. These funds are ideal for investors who are averse to risk and seek to generate regular income.

Debt funds are a good tool to use if you want steady income with low volatility and higher than bank returns. They also come with greater tax-efficiency than these products. We’ll address the advantages of debt funds and compare them with similar products in another article.

Let’s look at how SEBI has categorized debt funds.

1. Overnight Funds

These funds invest in overnight securities having a maturity of 1 day. They are the least risky of all debt fund categories, and this low risk comes with low returns. How these funds work is that at the beginning of each day, the AUM is invested in overnight securities, and since they mature the next day, the fund manager can buy fresh overnight bonds the next day using the principal and return earned. NAV of this fund will increase little by little over time. The advantage of this is that changes in the RBI rate, credit rating of the borrower do not affect your investment.

1. Liquid Funds

Liquid funds invest in debt and money market securities such as treasury bills, government securities, call money with a maturity of up to 91 days. These are a good tool to use to park surpluses and to build an emergency fund. These can also be used to transfer that surplus to an equity fund using a Systematic Transfer Plan (STP). What’s interesting to note is that some liquid funds even come with an instant redemption facility.

1. Money Market Funds

Money market funds invest in money market instruments such as commercial papers, certificates of deposit, treasury bills, repo agreements of the highest quality with a maturity of up to 1 year. These are suitable for investors with low risk appetite and an investment horizon of at least a year.

1. Corporate Bond Funds

Corporate Bond Funds invest in debt instruments issued by companies. These instruments comprise of the highest rated bonds, debentures, commercial papers and structured obligations. Minimum investment in corporate bonds by these funds is 80% of the AUM. They are suitable for investors with an investment tenure of 3-5 years.

1. Credit Risk Funds

Credit-risk funds are debt funds that invest at least 65% of total assets in papers rated less than AA (not of the highest quality). As these funds take on more risk than most other debt funds, they come with the ability to generate higher returns too. It is suitable for investors who can assume high risk and have an investment horizon of at least 3 years.

1. Banking and PSU Funds

Banking and PSU debt funds invest at least 80% of their corpus in debt instruments of banks, Public Sector Undertakings and Public Financial Institutions. They come with low risk and are suitable for investors who have an investment horizon of 1-2 years.

Invest now

1. Duration funds

Duration funds invest in debt and money market instruments that have different maturities. Based on the maturity of instruments, they are classified into ultra-short (3-6 months), low duration (6-12 months), short duration (1-3 years), medium duration (3-4 years), medium to long duration (4-7 years), long duration (7+ years). The longer the tenure of the fund, the higher its ability to take risk. Investors in these funds should invest if the maturities are in line with their investment horizon as the fund will take this time to give an investor his principal and the interest owed to him (Macaulay duration) for investing in the fund.

1. Dynamic Bond Funds

Dynamic bond funds invest in instruments with varying durations. These are actively managed funds and are suitable for investors who find it difficult to judge interest rate movement and have an investment horizon of 3+ years. This is because these funds hold securities with reducing portfolio maturity when interest rates rise and increasing portfolio maturity when interest rates fall.

1. Gilt Funds

Gilt funds invest at least 80% of their total assets in Government securities (G-secs). These are issued by central and state governments across various tenures, both long and short. They usually have no default risk as these are government backed. They do come with higher interest rate risk for instruments with higher maturities. These funds are suitable for investors with an investment horizon of 3+ years and benefit the most in a falling interest rate environment.

1. Gilt Fund with 10-year constant duration

Gilt funds as discussed earlier invest in government securities. In the case of funds with a 10-year constant duration, assets held in the fund have a Macaulay duration of 10 years and are suitable for investors with this investment horizon in mind.

1. Floater Funds

Floater funds invest a minimum of 65% of assets in floating rate instruments and the rest in fixed income securities. Floating rate instruments are those that don’t have a fixed interest. If interest rates rise, the interest from these funds also rise immediately. These funds invest in securities that have medium to long-term maturities.

1. Fixed Maturity Plans (FMPs)

FMPs are passively managed close-ended funds, where investments are held to maturity. These can be considered as an alternative to FDs as they have the potential to deliver FD beating returns. Another advantage they have over FDs are that they come with better tax-efficiency. We will discuss tax-efficieny of mutual funds in another article.