I come across many people who have done goal based financial planning and it makes me quite happy to see that they are going about things in a structured manner. however, more often than not, their financial planners or other advisers have encouraged them to create a separate portfolio with equity and debt allocation for each of their goals. A person who wanted my advice recently, had 7 goals, 12 MF schemes he was investing in equity and several types of debt instruments. He needed a financial planner to just give him a quarterly report on how his assets were doing.
As many of you are doing it exactly in the same manner, I can anticipate that my saying this will not make me a popular person, but I need to say it anyway. It makes no logical sense at all to map different portfolios to different goals and trying to do asset allocation for them at an individual portfolio level. Not only is it more cumbersome but, more importantly it does not add any value whatsoever. It is also a sub-optimal way of doing things that can be injurious to your financial health.
Let me try and explain it by an analogy. In your home you would be needing water for different purposes and for some of these purposes you need a specific type of water. For example, drinking water is normally separate and you may need distilled water in small quantity for your car batteries. However, for bulk of our water related needs we get water into an overhead tank and spend from there. Just like water does not differentiate in terms of what it is being used for, similarly money does not care which of your goals it is being spent for. It therefore makes no sense to have separate portfolios – no more than it would make sense to have different tanks for different purposes.
You do need to understand the future value of all your goals in order to establish a time line of goals. You may need 6 lacs for a car in 3 years, 5 lacs for a family vacation in Europe in 6 years, 35 lacs for your son’s college in 5 years and so on. Your investments in your 3 portfolios should be such that you would be able to redeem your financial assets to meet any of your goals, ideally from MF, next from debt and lastly from equity.
What about asset allocation – this is very important but it is at an overall level for your finances and not at a goal level. You can choose an asset allocation based on your comfort level and invest accordingly. This can be reviewed every year due to market conditions changing and goal based redemption, when you do the necessary re-balancing. With the portfolio structure I am suggesting, you will immediately see the following benefits:-
- You are dealing with far lesser number of products and it is easier to manage.
- Fewer MF means you can choose them more carefully and monitor them better.
- Asset allocation and re-balancing is at an overall financial level and therefore easier to do.
- Believe it or not, the overall investment needed in this methodology is less.
- As you have a single portfolio, there is no need to stop, start SIP and other similar transactions.
- Your investments continue for the long term, irrespective of some goals being reached.
- Redemption strategy ensures you are doing the most appropriate thing when you need to redeem.
Frankly, I do not see any negatives at all to this mechanism of investing and if others feel that there is, do let me know about it. Shifting from multiple portfolios for different goals to this model is relatively simple. You can re-align your MF portfolio by going through an earlier post that I had written. I suggest you do it quickly.
How do people start from scratch and build up these 3 portfolios over time? Read my next post to understand that better.
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