Can I use the same mutual funds for all my financial goals?

Published: March 19, 2021 at 11:14 am

If I have multiple goals likes retirement, holiday, 1st child’s college fee, 2nd child’s college fee etc., can I use the same mutual fund for all of them, or should I invest in separate mutual funds? A discussion.

We have to pull out the “it depends” card for this one. Also, which approach is “simpler” depends not on the number of mutual funds we hold but on appreciating our choices’ implications.

1. If your goals are well separated, then you are better off with separate mutual funds. For example, if you are saving up for a big holiday or a big camera that you wish to buy in the next few years, it should be separate from your child’s future goal 10-12 years away or your retirement 20 years away.

The risk associated with a 5-year goal is very different from that of a 10-Y or 15-Y plan. A unified portfolio (same mutual funds or same financial instruments for all goals) is a bit like trying to save up water to drink in the future in the same container. This container can wobble due to market forces, and some water could spill.

Suppose you combine a 5-Y withdrawal from a 15-Y withdrawal. You might overdraw for the 5Y need if the market is down at that time and affect the 15Y need. Of course, this mistake is possible even if there were separate water containers, but divisions are easier to perceive.

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    The point is, it seems simpler to manage a lesser number of funds. Still, in a unified portfolio, the tracking has to be precise because the total asset allocation is a mix of individual asset allocations. Cannot plan with the same equity asset allocation for 5Y goals and a 15Y goal.

    So, if you wish to use a unified portfolio, use one for all 5 & year goals and another for all 10,12 15Y goals (and maybe another for 20,25Y). This is because naive assumptions like “equity investment will do well over the long-term” will not pan out in real life.

    Of course, some goals can be naturally unified. For example, the UG and PG college expenses for your child, her marriage expenses, her startup capital can all be clubbed as “one goal”.

    If your kids differ in age by, say, 2-4 years, their future needs can also be thought of as one goal.  But if your retirement is ten years after your kid enters college, separating the two corpora can be messy.

    Of course, it is easy enough to track in Excel. If you have two SIPs for two goals in the same fund, you don’t need separate MF folio numbers. They can all be in the same fund, same folio, and you track them as two independent SIPs.

    Tracking is not a problem. When mutual funds provide a return equal to what we expected (= planned with), there is no problem. If they do not and there is a poor sequence of returns, managing two goals in the same portfolio becomes more challenging in a sense. We will have to re-assess the older goal, which could mean investing a lot more than we hoped for.

    We had earlier published a unified portfolio calculator. This can be morale-boosting about the total investment necessary. The amount to be invested with independent goals tends to higher than the amount with a unified portfolio. This is because a unified portfolio assumes today that you will invest more towards your retirement after kids enter college.

    This assumption can go wrong in a bunch of ways. We have ended up getting new recurring expenses, our income could reduce, or as mentioned above, poor sequences of returns would mean we have to invest more (because we have dipped too much the bucket for the first goal). The risk is lost time and can not be recovered.

    This is why even if you wish to use the same portfolio for all goals, it would be better to plan for goals independently and calculate the investment required separately. Even if we cannot invest the total amount necessary for all goals today, we must push ourselves to do this as much as possible.

    Then comes the choice of funds. If these are passive funds, then there would be no need to worry about them underperforming (if you choose passive funds for the right reasons). If these are active funds and you are using them for, say, three goals. If they drop in performance, you will either have to shift the corpus or add a new fund. This can get messy.

    Finally, de-risking. Most people have a naive way of reducing equity risk when the goal deadline approaches. There are unresearched opinions like “you can start reducing equity exposure 3-5 years before a goal deadline”. The data tells you sequences of returns risk is too high to leave it that late.

    Progressively de-risking a unified portfolio with multiple goals is a nightmare. The chances of overdoing it (take out too much) or undergoing (too little) are relatively high. There is more to a definition of “simplicity” than having a lesser number of funds.

    We firmly believe most investors are incapable of managing current and future risks in a unified portfolio. Planning for each goal independently with separate mutual funds is the “simpler” solution for the typical DIY investor or even the typical advisor!

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