Part 9: How to Fill Your Retirement Buckets?

Part nine: How to Fill Your Retirement Buckets?

Learn about the investment options for each of your three retirement buckets in detail.

Key takeaways:.

A simple yet highly effective investment strategy for DIY investors to fill the retirement buckets is:.

Bucket three : Core large cap equity funds.

Bucket two : Medium duration, high quality bond funds.

Bucket one : Overnight or liquid funds for liquidity.

Optional : US large cap funds for added diversification.

A curated list of funds in each category is available for reference.

In the previous two articles of this retirement learning series, we introduced the three Bucket Strategy, a simple and practical framework for building a sustainable retirement corpus.

While we briefly covered the types of investments suited to each bucket, this article takes a closer look at specific investment options.
The suggestions are aimed primarily at DIY investors who may not have the time or expertise to actively manage complex portfolios.

That said, the framework is flexible.
You can adapt the investment choices to match your preferences, experience, and risk tolerance, as long as they serve the purpose of each bucket.

Although we will describe the buckets in numerical order, remember that they are typically filled in reverse, starting with Bucket three and gradually moving to Bucket one as retirement approaches.

Bucket three The Wealth Building Bucket.

This bucket is the growth engine of your retirement corpus.
Since this bucket has the longest investment horizon, it can afford to take on higher volatility in pursuit of long term capital appreciation.

Core Foundation:.

For most investors, the core of this bucket should be simple.
Choose one or two well diversified large cap mutual funds with a consistent performance track record.
That is sufficient.
You do not need a long list of funds.
In fact, keeping the number small makes it easier to track performance over time.

Enhanced Growth (Optional):.

If you have a higher risk appetite, adequate investment knowledge, and a long runway to retirement, you may allocate a small portion of this bucket to mid cap or small cap mutual funds.
Keep this allocation below ten percent of your overall portfolio.
Another option is flexi cap funds, where the fund manager has the flexibility to invest across large, mid, and small cap stocks depending on opportunities.

Add Global Exposure (Optional):.

India offers strong long term growth prospects.
However, adding limited international exposure, particularly to the United States, can strengthen your retirement portfolio.
The US is the world’s largest economy and home to many global leaders in technology and innovation.
International exposure provides diversification benefits and may offer additional returns if the rupee depreciates against the dollar.
Keep this allocation focused on large cap funds only.

Do note that cost effective routes to invest in US markets through Indian mutual funds may not always be available due to SEBI limits.

A periodically updated curated list of mutual funds is available on the website for illustrative purposes only and does not constitute a recommendation.
You should conduct your own due diligence before making any investment decisions.

Bucket two The Income Protection Bucket.

As discussed earlier, this bucket is intended to cover approximately five years of your retirement expenses and protect them from market volatility.
Given this role, investments in this bucket should be safe and provide stable return.

A suitable choice is bond mutual funds that broadly meet the following criteria:.

Medium duration : (three six years).

High credit quality :(Government bonds or AAA/AA rated corporate bonds).

A detailed discussion on bond duration is beyond the scope of this article, but the key trade off is simple: higher duration bonds may offer higher yields but are more sensitive to interest rate changes and price fluctuations.

For this bucket, medium duration funds generally provide a balanced mix of return potential and stability, making them more suitable than short or long duration options.
If you are far from retirement and comfortable with higher volatility, you may consider long duration funds with strong credit quality, gradually shifting to medium duration as retirement nears.
Keep in mind that selling investments may have tax implications.

For fund ideas, refer to the periodically updated curated list in this category.
Alternatively, additional EPF contributions through VPF, along with the bond allocation in NPS, can also form part of this bucket.

Bucket one The Spending Bucket.

This bucket supports your immediate retirement expenses.
It should hold approximately one year’s worth of spending in highly secure and liquid investments so that your day to day needs are met without exposure to market fluctuations.

The priority here is safety, liquidity, and capital protection.
Overnight mutual funds and liquid mutual funds are well suited for this purpose.
They invest in high quality securities with very short maturities, typically ranging from a few days to a few months, which helps keep risk low.

You can refer to our curated list of funds for ideas.
As always, conduct your own due diligence before investing.
The next article will discuss our fund selection methodology in detail.

Conclusion.

The investment strategy outlined above may seem simple and intuitive, yet it can be surprisingly effective in building a strong and sustainable retirement corpus.
Here are a few key points to keep in mind:.

Choose Direct Plans : When investing in mutual funds, you will usually see two options: Direct and Regular.
Direct plans have lower expense ratios, helping you retain more of your returns over time.

Keep Fund Numbers Low : Limiting the number of funds in each bucket makes portfolio management easier.
Adding more funds does not necessarily improve performance.
Focus on selecting a few high quality funds with a consistent track record.

Monitor Performance Periodically : Review the performance of your funds at least once a year.