In the new year, everyone makes all kinds of resolutions. People also take resolution to improve their financial condition. Financial planning is necessary for how to improve the financial situation. With good financial planning, you can accumulate wealth for yourself in the long term. Investment should not focus on the person only on the returns. As an equity investor, you cannot get high returns every year. Some years your returns will be higher and some years it will be less. Going beyond the returns, focus on the plan. If you have chosen a sector on the advice of a friend or have invested only on being mentioned by many experts, then it is not right.
Compounding is very important in investment. Investing should start early because compounding takes time. Planning should be focused on investment. You can create wealth in the long term with planning. So how can we make the right plan for ourselves which we can implement easily.
What is three-bucket strategy?
Investors should look at the three-bucket strategy to create wealth in the long run. It involves allocation of assets based on cashflow and investor needs.
- The first will focus on the need for emergency and liquidity. Its duration can be up to 36 months. Assets can be fixed income which may include bank FDs, liquid mutual funds or ultra short term mutual funds. It will mainly focus on the need for cash and the need for immediate money.
- The second should have a duration of three to seven years which should include fixed income and equity mutual funds. In this, the balanced category of mutual funds, large cap equity can be taken. In this you get constant returns and there is less hope of volatility.
- The third is to make your wealth. There will be volatility in the portfolio. In this, you can take equity mutual funds in real estate investment, large, mid and small cap.
Implement the plan with discipline
It is important to maintain discipline in investment. Equity returns from 2018, especially mid and small cap have disappointed investors. The most important thing is to make a plan and implement it. Pay attention to it in the new year and make it your way of investing.
(By: Brijesh Damodaran, Managing Partner, BellWether Advisors LLP)