Avoid separate portfolios for each of your goals

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:-

  1. You are dealing with far lesser number of products and it is easier to manage.
  2. Fewer MF means you can choose them more carefully and monitor them better.
  3. Asset allocation and re-balancing is at an overall financial level and therefore easier to do.
  4. Believe it or not, the overall investment needed in this methodology is less.
  5. As you have a single portfolio, there is no need to stop, start SIP and other similar transactions.
  6. Your investments continue for the long term, irrespective of some goals being reached.
  7. 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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7 thoughts on “Avoid separate portfolios for each of your goals

  1. Great water analogy. But I am not clear on the Redemption approach that one will take in this. The main reason to invest in MF is because to lack of know how in ‘timing’ the market. In this approach timing of market is very important. In other goal based investing, I know that my portfolio to buy a car has reached only 5 lakhs so I need to postpone my goal. How does one do that here ?

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    • Not really timing the market – your debt portfolio can be redeemed in bad market situations. The strategy is to grow the debt portfolio from early days, so that you have coverage there for your goals, other than retirement. Search my blog for Goal based investing series and read the post with details of goal redemption.

      Liked by 1 person

  2. True one should not have separate portfolios for different goals. It gets cumbersome to manage and makes hardly any sense

    I would advise avoid retirement plans of different AMCs.

    Prefer normal sips only and redeem from those sips as and when u require as per the goals which u had set

    3 important goals

    Children education
    Children marriage
    Retirement

    Considering the time value of money investors should always plan these 3 goals properly. They are very important.

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  3. Agreed we don’t need separate investment for each goal but relying on one investment for all goals is a bit risky I think, given there are number of equity mutual funds in the market but not all of them gives same return, so best to have 2 to 3 investments for all the goals. So if One does bad others can compensate the loss.

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  4. Truely speaking from my heart..I used to follow so many blogs and financial stuff online or some advice on some social media sites but your Article used to be very authentic and practical.without any hidden things…thank you very much sir for creating such nice plate form for making financially literate ……………

    Like

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