'Treat Diwali bonus as hard-earned money, not free money'

A Diwali bonus can be more than an opportunity to indulge in festive shopping. It can also help strengthen household finances, reduce expensive debt and build long-term financial security.

But with multiple financial commitments competing for attention, how should salaried individuals allocate their bonus? Viral Bhatt, founder of Money Mantra, shares a practical approach to making the most of this additional income.

Edited excerpts:

Which financial assets can salaried individuals consider for investing their bonus, depending on their risk appetite and investment horizon?

First, for short-term goals, generally up to three years, capital stability and liquidity should be the priority.

Bank fixed deposits and other suitable, high-quality, short-duration fixed-income options may be considered. Equity funds are generally unsuitable for money that must be used in the near future. Debt mutual funds also carry interest-rate risk and credit risk, and their values can fluctuate.

Also read: What are Specialised Investment Funds? How to choose between SIF and MF?

Second, for medium-term goals (around three to five years), investors may consider a relatively conservative mix of fixed-income investments and suitable hybrid funds, depending on the goal and their risk appetite or risk tolerance.

The allocation should be cautious because market volatility can affect the value of investments over this period.

Third, for long-term goals (over five years), diversified equity mutual funds may be considered by investors who can tolerate volatility, depending on their risk appetite. They can also explore broad-based market index funds, large-cap funds, mid-cap funds, flexi-cap funds and multi-cap funds.

More volatile categories should be considered only when investors understand the additional risk and have an appropriate investment horizon.

For conservative investors, a suitable mix of fixed-income and hybrid investments is suggested.

Salaried individuals should also review their existing Employee Provident Fund (EPF) and Public Provident Fund (PPF) savings as part of their overall plan rather than viewing the bonus in isolation.

Most importantly, do not invest simply because an asset class has delivered exceptional recent returns. The right investment is the one that aligns with your financial goals.

What percentage of an investment portfolio should go into equity funds, particularly for new and existing investors?

The equity-debt ratio should be maintained according to age. For example, if a 30-year-old invests 70 per cent in equity, a 40-year-old should invest around 60 per cent in equity.

Also read: IPOs are booming. But should you invest?

Apart from that, you should definitely consider your financial goals, risk appetite and the time horizon of your overall investments.

Should individuals prioritise pending insurance premiums and other essential financial obligations before spending their bonus?

Absolutely. Essential financial obligations should be taken care of before discretionary festive spending.

Individuals should check for pending insurance premiums, overdue EMIs, school fees, utility bills and other important commitments. They should also ensure that their health insurance and term life insurance cover, wherever needed, remains active and appropriate.

It is important to understand that insurance and investments serve different purposes altogether. Do not postpone an essential premium simply to fund an additional festive purchase.

What are the common financial mistakes salaried employees should avoid when they receive a festive bonus?

I would highlight five common mistakes. First, spending the entire bonus on lifestyle purchases. Unplanned spending can create financial stress later in life. This is the first major mistake.

Second, using credit cards excessively and paying only the minimum amount due. This can turn a festive purchase into an expensive liability.

Also read: Want to invest in your city? Here's how you can buy municipal bonds

Third, investing because everyone around you is doing so. Whether it is gold, silver, stocks or a particular mutual fund, the decision should be linked to your own financial goals and risk profile. Fourth, chasing recent returns. Just because an asset class has performed exceptionally well in the past does not mean it will continue to do so. So, don't chase returns.

Fifth, ignoring emergency savings and insurance while focusing only on investments. A good financial plan needs protection and liquidity, along with wealth creation.

The biggest mistake is treating a Diwali bonus as free money rather than hard-earned money. Every rupee deserves a thoughtful decision.

Watch the full video here.