Investment discussions often start with the question of “what is the best way/instrument to invest in?” Detailed discussions often don’t precede investment actions. Hasty investment actions often mean that thorough discussions about the purpose of the invested money do not take place. Questions like “How soon will the money be required to be withdrawn?”, “what would be the nature of the investment goal this money fulfils?”, “what level of liquidity is required out of the investment?”, “to what extent can the investment time period be extended, in case the time taken to attain desired returns seems to extend?”, etc are either not asked, not answered or answered in haste. The best certified financial planners cannot show you good returns in the absence of the above discussions.

While deciding where your money should be invested, do not club all objectives, i.e. risk, returns, liquidity and safety of your capital into one category of investment. When it comes to selection of suitable mutual fund schemes, it is often expected that the scheme chosen should show great promise of returns, with as little risk of loss as possible, while also having an exit option at the shortest period of notice. While it is completely justified to expect your investment to fulfill expectations on these 4 parameters, clubbing them all and expecting a single product to fulfill them often ends up with the investment portfolio being too risky, too conservative, illiquid or just a confused mix.

This problem is often encountered by investors who don’t have a specific investment goal (apart from the low risk-high return-stability-liquidity quartet), or HNIs, UHNIs and Corporates who are just looking at a general investment and wealth creation objective.

In such a situation, one may end up with a portfolio too conservative in fear of equity market movements eroding portfolio value intermittently, or a portfolio way too aggressive for the greed of higher returns from equity linked schemes, or a portfolio that does not match the liquidity requirements. The investment portfolio does not get to realize its full potential while upholding all the expectations of the investor.

Bucketing, is a strategy that is used by some of the best financial planners to divide the investment capital into different parts or “buckets” based on the purpose that they serve.

These purposes could be linked to different types of goals, such as:
• Children’s education
• Vacation expenses
• Property purchase corpus
• Business liquidity management
• Retirement fund,
• Estate, etc.

They could also be divided to serve each of the basic expectations from the investment risk, return, safety, and liquidity.

Watch out for our next blog post for some interesting bucket strategies!