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Get rid of loans, start investing

April 30, 2010 12:07 IST
Bank employees will get a lumpsum that should be used to meet financial goals.

Earlier this week, the Indian Banks' Association (IBA) and the United Forum of Bank Unions signed an agreement for pay revision of all employees by 17.5 per cent with retrospective effect from November 2007.

Around 8,00,000 employees are expected to get pay arrears of 30 months. For the clerical staff, this amount could be in excess of Rs 30,000. For officers, it would be as high as Rs 2.7 lakh.

For many, this would be a windfall of sorts. Here's some help on using this money.

Liabilities: Retire high-cost debt such as those on credit cards and personal loans, at least a part, if not all. Anil Rego, chief executive officer, Right Horizons, said: "Repay some part of the home loan. But, not the entire loan, because there are tax benefits."

Insurance:Take a life insurance cover if you don't have one and have dependents.An additional health insurance plan is also important, over and above the one provided by your employer.

Investing strategy: A large portion of the remaining amount (say, 75 per cent) can be divided between a systematic transfer plan (STP), where you transfer a small portion on a weekly or monthly basis into an equity scheme (an equity diversified and a mid-cap fund or a balanced fund) over 6 to 12 months. "Six months is preferable because you lose out on gains if markets run-up over a 12-month period. But, a small time span will mean higher risk, too," added Rego.

The leftover chunk (the remaining 25 per cent) can be put into a monthly income plan (MIP) or a PE fund, which automatically rejigs debt and equity allocations in line with the price-to-earnings (PE) ratio of the market.

Debt-equity ratio: If your portfolio comprises mainly debt (80 per cent), allocate this windfall towards equity, with a longer term horizon (if not nearing retirement). Invest in balanced funds for a 3-5-year horizon and into large-cap oriented equity diversified or multi-cap funds for more than a 5-year time period.

If your portfolio is mainly into equity (80 per cent), allocate the windfall towards debt. Typically, your debt investment should be as much as your age. If you have time on your side, look at a debt-oriented hybrid product, which invests up to 20 per cent into equity to cash on market gains. The other option is to divide the amount between a debt-oriented hybrid fund and a fixed maturity plan (FMP). Otherwise, liquid plus funds will also give good returns, say experts.

Investing for children: For your child's education or marriage, experts suggest child gift funds offered by asset management companies (primarily a balanced fund) if you have time in hand. Hemant Rustagi, chief executive officer, Wiseinvest Advisors said, "For a horizon of under three years, debt-oriented balanced funds or a monthly income plan should help."

If you are nearing retirement (5-8 years away) and do not have any responsibility, you could divert this money towards post-retirement planning.

Experts say, put the lumpsum into a balanced fund, initially, say for four years. One year before retirement, move the money into any fixed income product to protect the capital.

If you do not have an immediate priority, invest it for the long-term. "If you have a conservative portfolio, take the first step towards making it aggressive and vice versa. Too much of either debt or equity is harmful," said Rustagi.

Neha Pandey in Mumbai
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