Creating an SIP bucket strategy for retirement: Short-term vs. long-term goals

SIP bucketing involves segregating investments into different “buckets” based on goal timelines. Short-term SIPs cater to needs 5-7 years away. Long-term SIPs are for 10–15-year goals. Bucketing helps assign appropriate funds, avoid premature withdrawals and manage liquidity.

Benefits of an SIP bucket strategy

SIP bucketing provides clarity on timeframes, so you can assign suitable funds accordingly. Short-term SIPs can be in debt funds to limit risk. Long-term SIPs help optimize equity exposure for inflation-beating growth. Laddering SIPs avoids the need for lumpsum withdrawals. Bucketing enables tracking corpus  progress goal-wise.

Meeting short-term needs with debt funds

For needs 5 years away, short-term SIPs of 3–5-year tenures can be allocated. Debt funds like banking and PSU funds, corporate bond funds, dynamic bond funds are suitable. Their relatively lower volatility helps limit risk while generating steady returns.

Achieving long-term growth with equity funds

For retirement 15-20 years away, long-term equity SIPs should comprise the bulk of investments. Index funds, large cap mutual funds, flexi cap funds help optimise growth. Their higher risk is mitigated by the long horizon. Maintain 15–20-year SIP tenures.

Balancing debt and equity asset allocation

Assign 60-70% corpus to long-term equity SIPs, 25-30% to short-term debt SIPs and 5-10% in liquid funds. Alter allocations depending on risk appetite and timelines. Equity funds target growth while debt funds ensure stability and liquidity.

Staggering SIP tenures in a ladder

Stagger SIP maturities instead of similar tenure SIPs. For the long-term bucket, have yearly laddered SIPs maturing from 10 to 15 years. For short-term, ladder SIPs from 3 to 5 years. This provides periodic liquidity aligned with evolving income needs.

Avoiding premature withdrawals

With SIPs bucketed by goal timelines, the need for premature withdrawals is lower. Redeeming long-term equity SIPs close to goals can be value destructive if markets are down. SIP bucketing ensures accessing the right funds at the right time.

Topping up SIPs to augment corpus

If corpus built through SIPs falls short of targets, top up existing SIPs instead of new SIPs. For equity funds, continue existing SIPs for time-advantage. Even Rs 5,000 additional SIPs in long-term funds can significantly augment the retirement corpus.

Mitigating risk through diversification

Within short-term and long-term buckets, diversify across 4-5 funds from different AMCs to mitigate concentration risk. Moderately allocate 20-30% corpus to each fund. Assign higher share to top performers. Periodically rebalance funds to restore allocation.

Tracking progress with online tools

Many AMCs offer online tools to track SIP progress goal-wise. Use them to monitor short-term and long-term buckets separately. Tools also indicate if you need to increase SIP amounts or if goals are on track. Evaluate progress annually.

Avoiding withdrawals in down markets

Bucketing enables accessing the right funds at the right time. Withdraw short-term debt SIPs during equity downturns. Avoid redeeming depressed equity units and instead redeem higher debt fund NAVs. Stick with allocation and rebalance once markets recover.

The SIP bucket approach brings structure and guides appropriate asset allocation for retirement planning. By segregating investments into short-term and long-term buckets, you optimize risk while preparing for retirement. To kickstart this journey, learn how to start an SIP investment and use tools like a monthly SIP calculator to manage your investments effectively.

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