Skip to main content

Manage windfall gains

 

Manage windfall gains

 





Here are a few ideas on how to use a large sum judiciously.

 

Most people are careful with their hard-earned money, but when it comes to wind fall gains there is a tendency to splurge it. Though the behavioural aspects behind the spending habits of Indians have not been mapped in a formal study, several surveys conducted in the US have revealed that almost one-third of those who won a lottery ended up seeking some sort of bankruptcy relief within a few years. Here, we have identified a few steps that would help you manage your lump sum gains judiciously.

After all it's your money

The unanticipated nature of windfall gains is responsible for the way it is spent or invested. Many people view a windfall as `found money' and treat it differently than money that they earn, such as salary and profits from businesses. They don't seem to understand that an unexpected income, such as the annual bonus your company pays during the festivities or your income tax refund from the IT department, is nothing but a part of your own hard-earned money. Similarly, the money raised through selling of your ancestral property should never be seen as a windfall. The next step is to convince yourself that even windfall gains, such as winning a lottery, is as valuable as the money you have earned through sheer hard work. If the amount is big, most financial planners would advise you to stash it in a safe place for 3-6 months before taking the final call on what you would like to do with it. This, however, does not mean that you do nothing with it. Instead of leaving it idle in a savings bank account, invest in a liquid fund and evaluate your options slowly.

Tax planning

Some of the money that comes your way may be tax-free, while others may be taxable in your hands. While the big amounts that you receive by way of provident fund withdrawals or gratuity amount will be tax free if you complete five years with the same company. There may not be much of a problem with your annual bonus because what you get in hand from the employer is the amount after tax deduction. However, if you are working as a consultant, and it is only the TDS that was deducted, then you would have to pay the remaining taxes yourself. If the sudden gains is from sale of assets, find out how much of that is capital gains and the tax rates applicable on it.

Repay debt

Repaying debt is one of the best ways to use a windfall. However, here again, you need to distinguish between different types of debt. You should immediately repay high-cost debts, such as personal loans or credit card outstanding and debts taken to buy depreciating assets, such as a car or white goods. But, what about housing or educational loans, where you get tax benefits?


One way is to leave them alone, the other is to make a partial repayment. Fully prepaying the mortgage debt on a self-occupied house may not be a good decision, but you can make a partial repayment and bring it down to the optimum amount of mortgage debt of `30 lakh to 40 lakh. The interest on self-occupied homes is exempt up to `2 lakh, and at 10% interest rates, `20 lakh loan is enough to generate that. We are suggesting a slightly higher optimum mortgage loan because the outstanding loan will keep coming down over the years.

Revisit your goals

If there's anything left after repaying your debts, it can be considered for investments or meeting some of your other goals. Says Anil Rego, CEO, Right Horizons: All unanticipated income should be invested or should be allocated to upcoming goals.

For example, if you were planning to buy your own house in, say, five years, a windfall may allow you to fulfil your dreams in advance. Similarly, you could allocate this money for your child's higher education, that you were planning to fund through loans, three years away. In this case, the allocated amount could be invested in some debt funds for the duration.

Don't splurge

While it is perfectly fine to meet your goals with windfall gains, resist that temptation to splurge. Just because you got a lump sum, you should not buy something which you do not need or cannot afford to own or will not be in a position to service in the future. Also be realistic with costs involved with the purchases. Most people have a tendency to buy one mega house just because they got a large sum. This move may be detrimental because it can exhaust the entire money you received and, therefore, jeopardise your other goals. Some may even end up taking a bigger loan to maintain the house. Buying a bigger car is another common mistake people commit. In addition to the cost of the car, other costs associated with it, such as maintenance, insurance, petrol bills, etc., may incur additional costs that you would have to bear.

Be conservative

You have also got to be careful while investing the money. Be conservative and don't risk or gamble away the luck you got. The biggest mistake people make is to invest without considering their risk appetite: While they may be conservative with their hard-earned money, they tend to take considerable risks with windfall gains. Don't invest everything into one asset class, whether it be real estate, equities or debt. Also, don't invest in the stock market at one go: First invest in a liquid fund and transfer small amounts regularly to equity funds using the systemic transfer plans (STPs).

For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call

Leave a missed Call on 94 8300 8300

Leave your comment with mail ID and we will answer them

OR

You can write back to us at

PrajnaCapital [at] Gmail [dot] Com

---------------------------------------------

Invest Mutual Funds Online

Invest Any Mutual Fund Online

Download Mutual Fund Application Forms from all AMCs

Download Mutual Any Fund Application Forms

---------------------------------------------

Best Performing Mutual Funds

    1. Largecap Funds Invest Online
      1. DSP BlackRock Top 100 Fund
      2. ICICI Prudential Focused Blue Chip Fund
      3. Franklin India Bluechip
      4. ICICI Prudential Top 100 Fund

B. Large and Midcap Funds Invest Online

      1. ICICI Prudential Dynamic Plan
      2. HDFC Top 200 Fund
      3. UTI Dividend Yield Fund
      4. Birla Sun Life Front Line Equity Fund
      5. Franklin India Prima

C. Mid and SmallCap Funds Invest Online

      1. Reliance Equity Opportunities Fund
      2. DSP BlackRock Small & Midcap Fund
      3. Sundaram Select Midcap
      4. IDFC Premier Equity Fund
      5. Birla Sun Life Dividend Yield Plus
      6. SBI Emerging Businesses Fund
      7. HDFC Mid-Cap Opportunities Fund
      8. ICICI Prudential Discovery Fund

D. Small and MicroCap Funds Invest Online

      1. DSP BlackRock MicroCap Fund
      2. Franklin India Smaller Companies

E. Sector Funds Invest Online

      1. Reliance Banking Fund
      2. Reliance Banking Fund
      3. ICICI Prudential Banking and Financial Services Fund

F. Tax Saver Mutual Funds Invest Online

1. ICICI Prudential Tax Plan

2. HDFC Taxsaver

      1. DSP BlackRock Tax Saver Fund
      2. Reliance Tax Saver (ELSS) Fund

G. Gold Mutual Funds Invest Online

      1. Relaince Gold Savings Fund
      2. ICICI Prudential Regular Gold Savings Fund
      3. HDFC Gold Fund
      4. Birla Sun Life Gold

H. International funds Invest Online

1. Birla Sun Life International Equity Plan A

2. DSP BlackRock US Flexible Equity

3. FT India Feeder Franklin US Opportunities

4. ICICI Prudential US Bluechip Equity

5. Motilal Oswal MOSt Shares NASDAQ-100 ETF

Popular posts from this blog

Birla SunLife Manufacturing Equity Fund

The Make in India program was launched by Prime Minister Naredra Modi in September 2014 as part of a wider set of nation-building initiatives. It was devised to transform India into a global design and manufacturing hub. The primary motive of the campaign is to encourage multinational as well domestic companies to manufacture their products in India. This would create more job opportunities, bring high-quality standards and attract capital along with technological investment to bring more foreign direct investment (FDI) in the country.   Why India as the next manufacturing destination?   The rising demand in India along with the multinational's desire to diversify their production to include low-cost plants in countries other than China, can help India's manufacturing sector to grow and create millions of jobs. In the words of our Honourable Prime Minister- Mr. Narendra Modi, India offers the 3 'Ds' for business to thrive— democracy,...
Read more

Mutual Fund Review: HDFC Index Sensex Plus

  In terms of size, HDFC Index Sensex Plus may be one of the smallest offerings from the HDFC stable. But that has not dampened its show, which has beaten the Sensex by a mile in overall returns   HDFC Index Sensex Plus is a passively managed diversified equity scheme with Sensex as its benchmark index. The fund also invests a small proportion of its equity portfolio in non-Sensex scrips. The scheme cannot boast of an impressive size and is one of the smallest in the HDFC basket with assets under management (AUM) of less than 60 crore. PERFORMANCE: Being passively managed and portfolio aligned to that of the benchmark, the performance of the index fund is expected to follow that of the benchmark and in this respect, it has not disappointed investors. Since its launch in July 2002, the fund has outperformed Sensex in overall returns by good margins.    While every 1,000 invested in HDFC Index Sensex Plus in July 2002 is worth 6,130 now, a similar amount invested in Sensex then wo...
Read more

IDFC - Long term infrastructure bonds - Tranche 2

IDFC - Long term infrastructure bonds What are infrastructure bonds? In 2010, the government introduced a new section 80CCF under the Income Tax Act, 1961 (" Income Tax Act ") to provide for income tax deductions for subscription to long-term infrastructure bonds and pursuant to that the Central Board of Direct Taxes passed Notification No. 48/2010/F.No.149/84/2010-SO(TPL) dated July 9, 2010. These long term infrastructure bonds offer an additional window of tax deduction of investments up to Rs. 20,000 for the financial year 2010-11. This deduction is over and above the Rs 1 lakh deduction available under sections 80C, 80CCC and 80CCD read with section 80CCE of the Income Tax Act. Infrastructure bonds help in intermediating the retail investor's savings into infrastructure sector directly. Long term infrastructure Bonds by IDFC IDFC issued an earlier tranche of these long term infrastructure bonds on November 12, 2010. This is the second public issue of long-te...
Read more

National Savings Certificate

National Savings Certificate Here's everything you need to know about the 5-year savings scheme offered by the Government This is a 5-year small savings scheme of the government. From 1 July 2016, a National Savings Certificate (NSC) can be held in the electronic mode too. Physical pre-printed NSC certificates have been discontinued and replaced with Public Provident Fund-like passbooks. What's on offer The minimum amount you can invest in them is Rs100 and there is no upper limit. Under this scheme, all deposits up to Rs1.5 lakh qualify for deduction under section 80C of the Income-tax Act, 1961. The interest earned is taxable. You can invest in multiples of Rs 100. These certificates can be owned individually, jointly and also on behalf of minors. The interest rates for all small savings schemes are released on a quarterly basis. The effective rate for NSC from 1 October to 31 December is 8%. The interest is calculated on an annual compounding basis and is given along w...
Read more

Kisan Vikas Patra - KVP

  Kisan Vikas Patra (KVP) First launched in 1988, the Kisan Vikas Patra (KVP) is one of the premier and popular saving scheme offering from the Indian Postal Department. This product has had a very chequered history- initially successful, deemed a product that could be misused and thus terminated in 2011, followed by a triumphant return to prominence and popular consumption in 2014. The salient features of KVP are as follows- The grand USP- Money invested by the applicant doubles in 100 months (8 years, 4 months). KVPs are available in the following denominations- Rs.1000, Rs.5000, Rs.10,000 and Rs.50,000. The minimum purchase value for the KVP is Rs.1000. There is no maximum limit. KVPs are available at all departmental post offices across India. These certificates can be prematurely encashed after 2 ½ years from the point of issue. KVPs can be transferred from one individual to another and from one post office to another. ----------------------------------------------------- Inve...
Read more
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now