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Want to invest using your Diwali bonus? FDs, equities, or mutual funds, which is better

Diwali will begin from October 22 and will continue till October 26. Markets will conduct a one hour Muhurat trading on October 24 due to Lakhsmi Pujan. (iSTOCK)Premium
Diwali will begin from October 22 and will continue till October 26. Markets will conduct a one hour Muhurat trading on October 24 due to Lakhsmi Pujan. (iSTOCK)

  • Dr. VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services said, “It makes sense to invest in fixed income assets like FDs during a rising interest rate environment like now. But ideally, the Diwali bonus may be used to buy high-quality stocks or for investing in mutual funds.”

Some companies usually pay a bonus to their employees during the Diwali festival. While the 5-days auspicious festival is just around the corner, the dazzle of Diwali has already commenced in many regions of India. Diwali is seen as a good or some would like to refer to the festival as a lucky occasion to invest for reaping fruitful gains in the future. That being said, if you are planning to invest using your Diwali bonuses, it is important to understand which is the best option to park your hard-earned money. Diwali will begin from October 22 and will continue till October 26. Markets will conduct a one hour Muhurat trading on October 24 due to Lakhsmi Pujan.

Dr. VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services said, "It makes sense to invest in fixed income assets like FDs during a rising interest rate environment like now. But ideally, the Diwali bonus may be used to buy high-quality stocks or for investing in mutual funds. In the long run equity/equity mutual funds outperform other asset classes."

Currently, Banks and NBFCs have hiked their interest rates on FDs as RBI has been raising repo rates for the fourth consecutive policy to tame inflation.

Among some major banks, SBI offers rates in the range of 3% to 5.85% on FDs below 2 crore to the general category, while senior citizens receive from 3.5% to 6.65% with effect from October 15, 2022. With effect from October 11, HDFC Bank is offering rates from 3-6.10% to the general category on FDs below 2 crore, while senior citizens earn between 3.5-6.75%. Further, since September 30, 2022, ICICI Bank is offering 3-6.10% to the general category, while the rates range from 3.50% to 6.6% to senior citizens on FDs below 2 crore. There are some banks and NBFCs that offer FD rates between 3% to 8%.

Meanwhile, with equities facing extreme volatility this year due to macroeconomic conditions, mutual funds are one of the investment mechanisms to hedge valuable returns. As of September 30, 2022, net assets under management (AUM) stood at over 38.42 lakh crore. The appetite for SIPs has been stellar this year.

Vijaykumar added, "SIPs in mutual funds are a very safe and sure method of participating in wealth creation through the stock market. Anytime is an ideal time to invest through SIPs. The auspicious occasion of Diwali would be a great time to start SIPs. Starting a SIP with a Diwali bonus would ensure many bonuses in the years to come."

From April to September 2022, the contributions in SIPs stood at 74,234 crore -- which is already nearly 60% of a total contribution of 1,24,566 crore recorded in the overall FY22. In September 2022 alone, SIPs' contribution stand at 12,976 crore. Since May 2022, contributions to SIPs have stayed above 12,000 crore. In the first month of FY23 (April), the contributions were 11,863 crore.

Notably, despite the current volatility in markets which has led to a significant correction in Sensex and Nifty 50 this year. However, in the last two Diwali, both Sensex and Nifty 50 have given double-digit returns.

From the Diwali that was celebrated on November 14 in the year 2020, Sensex has soared by a huge 14,773 points or 33.85% as of now. Nifty 50 has skyrocketed by a massive 4,531.55 points or 35.46%.

Nidhi Manchanda, Certified Financial Planner, Head of Training, Research & Development at Fintoo said, "It is strongly suggested to invest at least 30% of your Diwali bonus. Selecting an investment option will depend upon the risk appetite and investment horizon of the investor. One may invest in Fixed Deposits if in a lower tax bracket, conservative, and looking for short-term investment."

She further said, if one can stay invested for at least 5 years then investing a Diwali bonus in the equity market would be a good option as it will help to generate inflation-beating returns. However, if you are someone who doesn’t have the expertise to select the stocks yourself then opt for the mutual fund route. Investing in equity mutual funds will help to diversify investment and reduce risk.

Highlighting that FDs may offer attractive interest rates as rates do go up, however, Satish Ramanathan - Chief Investment Officer - Equity, JM Financial Asset Management further said, but post taxes and inflation their return will not be significant.

Thereby, Ramanathan recommends, equities as an attractive asset class post capital gains and inflation. Hence investors may choose to allocate investments in fixed deposits for liquidity purposes, but to beat inflation equities will still be the preferred route.

In its Muhurat picks report, ICICI Securities said, "Going ahead, we believe Corporate India will likely deliver earnings growth in excess of 15% over the next two years given the current economic milieu and provide a plethora of investing opportunities in Indian markets. However, sticky global inflation will keep central banks hawkish and India will be no exception. Similar implications for global liquidity flows may create medium term volatility in Indian markets. However, if such a scenario materialises, then the same will be a strong opportunity to take exposure to Indian equities. Our one year forward, Nifty target is at 19425 (21x FY24 EPS) with sectoral bias towards banks, capital goods/infrastructure, autos, avoiding sectors having more global exposure like IT, oil & gas and metals."

Further, the report said, "we see reasonable opportunities across the market spectrum with key filter being quality. We continue to advise investors to utilise equities as a key asset class for long term wealth generation by investing in quality companies with strong earnings growth and visibility, stable cash flows, RoE and RoCE."

Currently, India's inflation is at a multi-year high of 7.41%. When inflations are high, the cost of products and investments is also higher which reduces the value of the savings when they are earned. Thereby, it is very important to choose investment schemes that can help you earn inflation-beating returns.

 

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.

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