How Bucket Investment Strategy can help wealth creation in the long term?
Many of us would invest in equity or mutual funds or fixed income options. Sometimes, by getting tempted with returns, we might move money from one bucket to another bucket. This unplanned movement of funds can restrict us to get higher returns in the medium to long term. Here comes the bucket investment strategy. Under bucket strategy, we can bucket investments for short, medium and long term. This strategy can help in generating wealth in the long term. What is this bucket strategy and how does it work? How Bucket Investment strategy can help wealth creation in the long term?
What is Bucket Strategy in investment and how does it work?
Bucket strategy in simple terms is to segregate your investments into various buckets and invest accordingly. Bucket strategy can be used for wealth creation in long term + to get regular inflows. In this article, we would cover only on wealth creation in long term.
Here is a sample bucket strategy for wealth creation.
1) Bucket-1 (Short term) – Invest money for any emergency / liquidity needs for the next 3 years time frame.
2) Bucket-2 (Medium term) – Invest money you might need in between 3 to 7 years time frame
3) Bucket-3 (Long term) – Invest money which you would not need for the next 7 years time frame.
We can even expand them to 5 buckets or 7 buckets based on the individual need.
Where to invest money based on bucket strategy?
Let us check where you should invest your money based on this bucket strategy.
1) Bucket-1 (Short term) – < 3 years Time Frame
You should calculate how much money you might need as an emergency fund or liquid funds for the next 3 years time frame. You can choose any of the following investment options to invest for short term need.
i) Bank Fixed Deposits
ii) Ultra Short Term Funds
iii) Liquid Mutual Funds
2) Bucket-2 (Medium term) – 3 to 7 years time frame
Invest the money you need between 3 to 7 years time frame. You can invest in any of the following options
i) Medium term debt funds
ii) Multi asset mutual funds
iii) Balanced Mutual Funds
3) Bucket-3 (Long term) – > 7 years
Under this bucket investment strategy, one can invest money, which they do not need in the short term to medium term. You can invest in any of these investment options
i) Large Cap Index Fund or Large Cap Funds
ii) Midcap Funds
iii) Small cap funds
Investment in real estate also can fetch high returns. But liquidity is an issue.
How 3 Bucket Investment Strategy can create wealth in the long term?
Based on this bucket strategy, you would utilize the funds from bucket-1 for all your short term needs. Your bucket-2 would earn fixed income for medium term. Your bucket-3 would continue to grow in the long term. Here is an illustration that can help you understand this concept better.
1) Mr. Rajesh saved Rs 10 Lakhs till now
2) Can invest Rs 50,000 per month beyond current expenses.
3) Monthly expenses Rs 40,000.
4) Basic financial planning is done (life insurance and health insurance for self and family members).
5) Need Rs 2 Lakh per year for kids education for next 10 years. Assume he would take this out from savings, no separate plan required.
6) Need 6 months for emergency money (short term). It would be Rs 40,000 x 6 months = Rs 2.4 Lakhs.
7) Need Rs 5 Lakhs between 4-5 years for a foreign vacation (Medium term).
8) Want to create wealth for long term + for retirement. This would be the balance i.e. Rs 2.6 Lakhs ( 10 Lakhs – 2.4 Lakhs – 5 Lakhs) + 50,000 per month savings that needs to be invested.
Below are some rough computations. Actual returns might change based on investment dates (like monthly SIP). Also short and medium term investment options can generate some returns too which would be surplus.
Bucket – 1 – Short Term
It’s only for emergency funds to meet 6 months expenses. If this is not utilized, one can move these funds / excess funds to bucket-2 or bucket-3.
|Bucket 1 – Short Term Goals|
|Year||Year beginning balance||New Investments||Returns @ 6% on beginning balance||Year end balance|
Bucket – 2 – Medium Term
It’s only for short to medium term needs. If this is not utilized, one can move these funds / excess funds to bucket-3.
|Bucket 2 – Medium Term Goals|
|Year||Year beginning balance||New Investments||Returns @ 7% on beginning balance||Year end balance|
Bucket – 3 – Long Term
|Bucket 3 – Long Term Goals|
|Year||Year beginning balance||Monthly @ 50K minus kids’ education of 2L||Returns @ 12% on beginning balance||Year end balance|
These are for long term needs. There would be inflow through fresh investments + inflow through surplus from bucket 2 or bucket 3. You would not open your investment portfolio every day to check the ups and downs of stock markets and would avoid your BP and Sugar levels to go up. In the long term, such investments would turn always fetch higher returns.
The above is not comprehensive plan. This is just a simple plan on how an individual can create and plan their long term investments. This can be customized based on the individual needs, increase / decrease emergency money or medium term investments etc.,
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