You should use the hike amount to start a systematic investment (SIP) in mutual funds.
By now, most corporates would have finished their annual employee appraisal process. Based on your performance, your company may have given you a hike along with a performance bonus. You must use the additional income in a productive manner. Do not let it lie idle in your bank or be splurged on consumption and lifestyle. As a healthy financial practice, this money must be channelized into avenues that can give good returns, create wealth, and help secure your finances. As a wise investor, you would not want your hard-earned money to depreciate; rather, you want to see it grow. The five options listed below can help in multiplying your extra income.
Start or increase your mutual fund SIP
You should use the hike amount to start a systematic investment (SIP) in mutual funds. This not only helps you be a regular investor but also create wealth while beating the menace of inflation in the long run. In case you already have an SIP, you can increase the quantum of your monthly investment in your existing schemes or you can opt for other schemes after consulting your financial advisor.
Increase your PF contribution
Salaried employees generally contribute 12% of their basic pay to the Employee Provident Fund. However, you can increase this amount as per your convenience. If you are a conservative investor and want assured returns along with capital protection, you should opt for increasing your contribution to your PF whenever you get a raise in your salary. This also helps you get tax rebate under Income Tax Act Section 80C.
Pre-payment of your existing loans
In case you have pending equated monthly instalments or EMIs on your existing loans - personal loan, vehicle loan or for that matter home loan - it is advisable to use some portion of your increased salary to make principal pre-payments towards your borrowings. This helps you get rid of your liability sooner than the actual tenure of loan, thereby reducing your interest outgo as well as lowering your financial stress. However, you should avoid pre-payments if you are nearing the completion of the loan tenure to avail maximum tax benefits on home loan principal and interest outgo.
Buy insurance cover
Since life is unpredictable, it is wise to have financial safety nets to protect your family against any untoward eventualities. It could be your untimely demise or sudden health issues which need to be addressed urgently. One should use the additional surplus as part of premium payment to get a cover under term life insurance ensuring financial health of your family in your absence. You can also utilise your extra income for buying comprehensive family health insurance policies.
Look for tax saving investments
With rise in salary, your tax liabilities too rise. In case you aren’t able to save to the full extent of the Rs. 1.5 lakh available to you under Section 80C, use your increased income to improve your tax-saving investments. This, on the one hand, helps you reduce your tax payout every financial year; and on the other, the investments thus made get you the much needed growth in your investments. You can choose options like equity linked saving schemes (ELSS) offered by mutual fund companies if your risk appetite is moderate. Conservative investors may go for Public Provident Fund (PPF) or National Saving Certificates (NSCs).The writer is CEO, BankBazaar.com.