A reader asks, “Can I use just one mutual fund for all my financial goals like retirement, child’s education, etc.? Or should I buy separate mutual funds for each goal?” We assume the “one mutual fund” refers to an equity fund.
The short answer is you can do both. I prefer separate mutual funds for each goal. For details, see Portfolio Audit 2023: The annual review of my goal-based investments. I also know several investors and advisors who prefer just 1-3 mutual funds for all financial goals. This is known as the unified portfolio, which we have discussed before.
- Financial Goal Planning with a Unified Portfolio
- How I manage my money using the unified portfolio approach
- Implementing the Unified Portfolio Approach in the Wealth Accumulation Phase
The freefincal robo-advisory financial planning tool provides both the unified portfolio method and independent portfolios for each financial goal. This is an illustration from the tool.
The black arrows represent investment portfolios. The red arrows represent systematic withdrawals before each goal in the unified portfolio.
Things to consider when using the unified portfolio
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- You can use a single equity index fund (Nifty/Sensex) for the portfolio’s equity component. You can use EPF (for retirement), PPF, fixed deposits or debt mutual funds. See: Which debt mutual fund should I use for long-term financial goals?
- If you prefer, you can use 1-3 equity mutual funds. Some investors like to combine index funds with active funds. This is perfectly fine as long as the goal planning is robust. See: The active vs passive debate is not important in portfolio management.
- Never combine short-term and long-term goals in a unified portfolio. They have different risk profiles. Ideally, all goals in the unified portfolio should be at least ten years old.
- Have a risk-management strategy in place before you start investing. A few years before the goal deadline, it is better to withdraw from the unified portfolio and keep aside the corpus needed for that goal. This is illustrated above and incorporated into the freefincal robo advisor tool.
- Ideally, the last goal should be retirement.
Whether it is an independent portfolio or a unified portfolio, neither method is superior. It is only a matter of which is more suited to our temperament. So instead of asking others which is “better”, we should ask ourselves which would help us sleep better.