In order to create wealth in a disciplined manner, individuals must look at a four-stage bucket strategy based on their financial goals and needs, time horizon and risk appetite. While asset allocation should be the core of any investments, spread your investments in multiple assets to minimise the risks from market volatility and inflation and gain from the compounding benefits.
Bucket 1: Emergency funds
The first bucket must take care of any emergency requirement of funds. Ideally, build an emergency fund equivalent to six to 12 months of household expenses. Park a part of the emergency fund in high credit quality debt mutual funds, which is tax efficient as compared with a bank deposit if held for more than three years. Look at bank and post office fixed deposits so that the money can be liquidated immediately. While returns from these instruments will be low, it will help in case of cash flow needs and immediate money requirements.
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Bucket 2: Short-term
The bucket of investments should look into short-term financial needs. The investment duration here should be for a period of two to three years with asset class comprising fixed income, short-term debt and dynamic bond funds. Investors can also look at balanced advantage funds of mutual funds.
Bucket 3: Medium-term
As investments in this bucket would be for below five years, you must take some exposure to equity through large-cap funds, which can deliver constant returns without the possibility of volatility in the returns. You can also opt for multi-asset funds which are dynamically managed hybrid funds and ideal for those who do not want to risk investing in one particular asset which is volatile and instead look for steady returns.
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Bucket 4: Long-term
Investments in this bucket should be for wealth creation. Look at real estate investments, stocks of quality companies and equity mutual funds that can help in building a retirement corpus. Also go for Public Provident Fund and National Pension System as both are exempt from tax at all stages. Also invest in multi-cap funds to beat volatility in the long run.