Venkat has identified 6 goals in his financial plan.
His own retirement due in 30 years.
His daughter’s higher education due in 15 years and 18 years respectively.
He needs a downpayment for his home in 10 years.
He wants to maintain an emergency funds portfolio and finally, he wants to buy a car in 5 years.
But now he is thinking.
Should he have a different portfolio for each of the goals? Or, he can have just one portfolio for all his goals?
If he has to have different portfolios, should he select different funds for each portfolio or can he use the same set of funds?
Further, that makes him buy several funds which goes against what Unovest has recommended to him – about half a dozen funds are enough to fulfil all investment needs?
Confusion galore.
What should he do?
Let’s help Venkat here in creating his portfolio. First off, some basics.
Having multiple portfolios or a single portfolio is a very personal choice. You may want to accord certain sanctity to each of the goals and hence invest in them separately.
Or, you may want to combine all of the goals and have just one portfolio and based on when the goal is due, rebalance and shift out to meet that goal.
Any of these approaches is fine.
If you are taking the first one of having multiple portfolios, then all you need to do is to have different folios for each of your goal. This would allow you to track them distinctly.
Remember, this does not mean that you need to have different funds for each of the goals. You can use the same mutual fund schemes but in different folios.
In case of the latter, you just need to bring in all the common risk + time horizon parameters and hold your investments accordingly.
So, if you have a less than 1 year requirement, you can 1 or a couple of liquid funds holding all your investments for your goals for that period.
If you have a greater than 1 year but upto 3 years, even 5 for that matter, you can choose ultra short term + short term funds. Again total up all your investment goals for that period and make the investment. Even as your goal maturity date approaches near, you need to shift your investments accordingly.
If you have a horizon of over 5 years, preferably 10 years, you can afford to hold equity schemes in your fund. The same logic applies. Total the goals and have one folio for each of the schemes that you invest in.
Based on your risk profile, you can choose to be conservative, moderate or aggressive with your choice of fund schemes. Unovest already has that differentiation in place with its 13 recommended portfolios for various risk profiles and time horizons.
Coming back to Venkat, the decision is easy to implement in case he wants to maintain different portfolios. This means same funds and different folios for each scheme and not different funds.
If he decides to go with a consolidated portfolio, this is how he can implement it.
The emergency funds can be parked in a combination of very short term and short term portfolio.
The funds for car can be parked in the short term portfolio.
All other funds for goals over 5 years can be combined into one (assuming they carry the same risk appetite) and one portfolio can be created for the same.
This approach helps you keep the investment portfolio simple and easy to manage.
I have total 7 goals and all are between 14 years and 25 years. I am interested having multiple portfolios, then I need to do is to have different folios for each of the goal.
This would allow you to track them distinctly.
My query is , should i create 7 x 4 funds(Enhancer Portfolio) = 28 Folios to achieve the same . But i feel its clutter.
How effectively design portfolio for my case.
Now i have clubbed and reduced my goals as 4 in total.
Again 4×4 = 16 Folios to achieve multiple portfolios.
Can you share your views
Having different folio for different goals can be an effective strategy. It allows you to keep the investments segregated and ensure that what is due to one goal is not used for another.
However, as you mention it does lead to a lot of tracking. But since it is electronic these days and you can pretty much map your folio to your specific goal, it should not be so much of a problem.
Here, I should mention that you can use Unovest’s goal tracking (it is simple and limited in its own way, still). Even if you make only 4 folios, you can use the goal tracker to allocate a proportion of the folio to each goal and then the tracker would show you progress. This creates a virtual segmentation and can be equally useful.
Thanks Vipin for your clear cut response.
Just curious to know, whether having single portfolio with 4 Equity funds Vs Multiple Portfolio ( 4X4 = 16 folios ) of the same 4 Equity funds. Will it make any difference in managing.
Because your Goal tracker does the same job of Multiple portfolio.
The virtual segmentation is equally useful in managing. As long as you can see the portfolio divided up for your different goals, it should not matter which folio it comes from.