Can a Single Portfolio help you Fulfil Multiple Financial Goals?
What is a single investment portfolio approach?
An individual may have different financial goals, such as building a child’s higher education fund, building a fund for a house’s down payment, building a retirement fund, etc. With a single investment portfolio approach, an individual plans and invests for all their financial goals through a single portfolio.
Asset allocation requires an investor to invest in asset classes such as equity mutual funds, fixed income, gold, etc. So, while making a single investment portfolio for multiple financial goals and managing asset allocation, an investor must include one equity mutual fund, one fixed income mutual fund, and one gold fund of fund (FoF).
Challenges with a single investment portfolio
The challenges with a single investment portfolio with multiple financial goals include:
- Different timelines: Every financial goal will have a different timeline. So, managing all financial goals (with different timelines) within a single portfolio may not be feasible.
- Some financial products are meant for a specific purpose: Some investment products are meant for specific financial goals only; hence it may not be possible to include them in a single investment portfolio. For example, you can invest the debt portion of your child’s education fund in Sukanya Samriddhi Account (SSA). However, a single portfolio with SSA will not work for the boy if you have two children (a boy and a girl).
- Tax efficiency: In a single investment portfolio, an investor may choose only one financial product from each asset class for multiple financial goals. Hence, the choice of a financial product may not be tax-efficient. For example, an investor may have to choose a single investment product for child education and retirement planning. In such a case, they cannot choose the National Pension Scheme (NPS), which provides good income tax benefits. Hence, choosing investment products in a single investment portfolio may not provide the best tax efficiency.
- Goal mapping and monitoring: Since multiple financial goals are mapped to a single investment portfolio, there is no proper labelling of which investment is for which financial goal. It isn't easy to monitor what percentage of the money you have accumulated for each financial goal.
- Lastly, if you have to stop investments in a single portfolio, for whatever reason, all the financial goals will suffer.
What is a multiple investment portfolio approach?
- With multiple investment portfolios, an individual can make a separate financial plan for each financial goal. The portfolio planning for each financial goal can be done based on the investment time horizon, the asset allocation, the choice of financial product, tax efficiency, etc.
- You can map each portfolio to a specific financial goal, and accordingly, you will have a clear idea of how much money you need to accumulate for the goal. Then, you can calculate how much you should invest, review regularly, make changes if needed, and track the progress till the financial goal is achieved.
- Having a separate portfolio for every financial goal helps an investor to keep them separate and resist the temptation to make a premature withdrawal. In short, the multiple investment portfolios approach can help you solve most of the challenges you may face with a single investment portfolio approach.
Multiple investment portfolios approach asset allocation
- Let us take the earlier example of an investor with three financial goals: building a child’s higher education fund, building a fund for a house down payment, building a retirement fund, etc. It is recommended an investor should follow asset allocation for each financial goal.
- Suppose the investor follows equity and debt asset allocation. In that case, they will have to invest in six different mutual fund schemes (3 financial goals x 1 equity scheme and 1 debt scheme for each financial goal). Managing six mutual fund schemes for just two financial goals may be time and effort-consuming.
- The portfolio management will get more complicated if the investor's asset allocation includes equity, debt, and gold. In this case, the investor will have to invest in nine different mutual fund schemes (3 financial goals x 1 equity scheme, 1 debt scheme, and 1 gold mutual fund scheme for each financial goal).
Multiple investment portfolios approach with hybrid and multi-asset allocation funds
An investor wants to follow the multiple investment portfolios approach in the above scenario. At the same time, it is important to follow asset allocation. In such a scenario, if the investor chooses to invest in a hybrid mutual fund scheme, they will have to invest in only 3 mutual fund schemes (one mutual fund for each financial goal) instead of 6 (as mentioned earlier). A hybrid mutual fund scheme will give the investor the much-needed asset allocation of equity and debt in a single mutual fund scheme.
Similarly, if investors want to follow asset allocation with equity, debt, and gold, they can invest in a multi-asset allocation mutual fund scheme. In this case, for 3 financial goals, the investor will have to invest in only 3 mutual fund schemes (one mutual fund scheme for each financial goal) instead of 9 (as mentioned earlier). A multi-asset allocation scheme will give the investor the much-needed asset allocation of equity, debt, and gold in a single mutual fund scheme.
Multiple investment portfolios approach simplified
As mentioned earlier, investors can follow the multiple investment portfolios approach for financial goals. However, for asset allocation, if they choose to invest through hybrid funds (equity and debt) or multi-asset allocation funds (equity, debt, and gold), it simplifies things. The investor must manage only one scheme with appropriate asset allocation for each financial goal. Thus, in the scenario we discussed earlier, the investor will have one separate mutual fund scheme for each financial goal: child education fund, house down payment fund, and retirement fund. Labelling each scheme with a financial goal will make it easy to monitor the performance till the financial goal is achieved.
Investing in mutual funds with the Glide Invest App
In this blog, we have understood the difference between a single investment portfolio and multiple investment portfolios for multiple financial goals and which approach should help an investor select. You can partner with the Glide Invest App for your financial planning journey to get recommendations for the appropriate mutual fund schemes based on your risk profile. You will get advice on planning and systematically investing towards your financial goals.
With Glide Invest, you will get guidance for:
- A personalised risk profile assessment
- Identifying your financial goals
- Appropriate asset allocation
- Making a financial plan for each goal
- Automating the financial plan
- Review and analysis of your financial plan
- Hand holding you till your financial goals are achieved