Here’s a definitive cheat-sheet for funding your Diwali splurge, surviving unplanned expenses and impulsive spends and making smart investments a Diwali Resolution!
Diwali, the festival of lights, is also an auspicious occasion to review one’s investment portfolio. Samvat 2073, marking India’s official new year (The Vikrami era) has commenced on April 8, 2016. But for the business and the broker community the new Samvat commences on Diwali day, when they introduce new books of account after performing ‘Lakshmi Puja’, the worship of the goddess of wealth. Thus, Diwali is an ideal time to buy new personal/ household items and also to make investment plans for the next year.
Let us find out how you can responsibly fund your Diwali splurge:
Investments in equity market or mutual funds
If you have investments in equity market or Mutual funds it would a good idea to book partial profits and generate surplus cash, as equity markets have generated over 20% returns in the past 6 months. The current trends indicate that the markets are ripe for a reasonable correction after the rise, and they will give you an opportunity to re-enter at attractive prices after the correction.
Government employees, use your arrears
Those in Govt. jobs, who have recently received the Pay commission arrears, can utilize a portion of the cash for Diwali purchases. However, 50% of the same may be kept aside for long term investment. Those working in Private sector can also hope for a decent Diwali bonus.
Handle fixed deposits with care
Your existing Fixed deposits may also be used to fund your Diwali purchases. But please remember a few golden rules: Avoid breaking long duration Fixed deposits (FDs) which are locked at a higher rate of interest, because you may be a loser as you will not be able to make re-investment in FDs at the same higher rates, as the interest rates on deposits have been falling since the past 2 years and this declining trend in interest rates is likely to continue. You may opt for a short term loan against an FD that is maturing shortly, in order to avoid loss of interest due to premature penalty (most banks give loans against FD up to the extent of 90% of the deposit)
Leverage Diwali offers / bank loan bonanzas
Option of seeking a loan from the Bank is also an attractive option during the festival season. Most banks offer loans at attractive interest rates during the festival season. The processing fees are generally waived off during this period. If you are planning to buy a house or vehicle you may opt for the ‘Home loan’ or ‘Vehicle loan’. If you want to spend the money for consumption or house improvement you may opt for the Personal loan. Some banks offer such loans as an extension of the existing home loan which carries a lower rate of interest. Before availing the loan please compare the loan rates offered by various banks and NBFCs.
Capitalize on credit card benefits
Credit card is a good option for ‘Diwali splurge’ provided you take the necessary precautions. Let us first count the advantages of the credit card. The most important feature of the credit card is the convenience factor: Cards issued by Visa/ Mastercard/ Rupay cards are accepted for payment at most reputed merchant establishments in India. Most card companies reward the card users in 2 ways: by offering an upfront discount or cash back, and secondly offering reward points which when accumulated can be used for goodies. Most credit cards also offer interest free credit for up to 45-50 days (30 days billing cycle plus 15-20 days for payment). Please use your card judiciously to avail these benefits.
But let me also caution you about the Credit card pitfalls: Please use the credit card only to the extent you can pay after 45-50 days, because a roll-over of outstanding amount on your card can cost you a fortune (card companies usually charge interest at the rate of 30-42% per annum). A penalty may also be levied if you are unable to repay the minimum amount due. And the biggest pitfall of default on the credit card is the lowering of your CIBIL credit score, which may hamper your ability to avail any loan from the banking system in the future.
There are a plethora of attractive options during the festival season which tempt us to go for impulsive spends, which needs to be controlled. It is advisable to make a list of items to be purchased over the next 6-12 months, and prioritize them according to their importance and urgency. We need to understand that are needs are unlimited but the resources are limited. Loans and Credit cards are temporary means to increase our resources, because uncontrolled use of these amount to reduction in our future disposable income (We have to use a portion of our future income to repay credit card dues and EMIs).
Now coming to the most important point: While we worship ‘Lakshmi’ the Goddess of wealth, we must formulate our ‘Financial resolution’ for the new Samvat year, so that ‘Lakshmi’ continues to shower her blessings on us during the next year as well. It is very important for us to increase our surplus (which can be achieved by controlling our expenses or increasing our income) to meet the growing aspirations of our family.
Some small steps for controlling expenses and Increasing income:
- Avoid wasteful expenditure: Avoid buying clothes/ jewelry/ electronic items which are not immediately required. With the change in trends these items become obsolete very fast, better products are available at lower prices, due to advancement in technology.
- Look for value: ‘Cheapest is not the best’, weigh the long term advantages of a product before buying. E.g. most electronic items now carry BIS star rating, an item with a higher rating is likely to reduce the usage cost (like electricity consumption) in the long run. Using LED based devices is not only environment friendly but reduces electric consumption drastically.
- Become tax efficient: With the high incidence of taxation, one must invest funds in financial instruments that allow us to save on taxes in a legitimate way. Certain loans availed by us give us excellent tax advantages, e.g Home loan & Education loan. Taking a Home loan for a second house is a very good option as it helps us to earn rental income and also qualifies for tax exemption. Buying a house in the name of a female member (in a joint property her name should be first) to qualify for interest rebate from banks as well as lower registration fee payable to the Govt.
- Investment for future goals: Your Diwali resolution must include starting a new SIP in an equity mutual fund, depending upon your surplus, so as to lay the foundation of a more colourful Diwali in the years to come. Remember, equity mutual funds are most tax efficient way to create long term wealth. Past trends indicate that they have given tax free returns of 13-14% on an average over long periods (5 years and above)
Wishing you a ‘Happy & prosperous Diwali’, may goddess Lakshmi shower her choicest blessings on you and your family in Samvat 2073 and the years to come.